Shares of Brazilian food giant BRF S.A. (NYSE:BRFS) popped on Monday morning, after the company reported a surge in sales for the first quarter of 2020. As of 12:30 p.m. EST, the stock was up 10%.
While BRF S.A. is based in Brazil, the country accounted for only 54% of of Q1 revenue. The rest was generated in many countries internationally, meaning the business was more exposed to the global coronavirus than many others. This largely explains why the stock is still down 58% year to date.
BRF S.A. products include frozen and refrigerated meats and dairy products -- high-demand food items for cooking at home. We've seen pantries packed in the U.S., but the phenomenon is measurable anywhere the COVID-19 pandemic has closed restaurants and quarantined diners at home. With 43% Brazilian market share, BRF S.A. was a beneficiary as that country locked down. Net operating revenue for the Brazil segment was up 18% year over year.
But it's not just Brazil. Internationally, BRF S.A.'s net operating revenue increased 26% in Q1. Interestingly, revenue gains substantially outpaced sales volume. In Brazil volume was up only 11%, and it was up only 7% internationally. The disparity is due to higher average sales prices.
Reasons vary, but BRF S.A.'s management gave one example of what caused higher sales prices. Saudi Arabia is a key market for the company, but it's restricting imports. With less supply and increased demand, sales prices went up on products BRF S.A. is still exporting, which increases profits.
BRF S.A. stock has now recovered over 40% since March lows, including today's gain.
For BRF S.A. it was a good quarter for sales growth, and the stock is understandably going up today. However, if I were a shareholder, I'd be concerned about profitability. The company highlighted that Q1 adjusted EBITDA grew 67% to 1.3 billion Brazilian reals. However, by generally accepted accounting principles (GAAP), it had a net loss of R$38 million -- around $6.5 million U.S. dollars.
My concern is that some factors benefiting BRF S.A. (sales volume, higher sale prices) could be temporary. If it struggles with profitability now, how will it fare when these tailwinds abate? For that reason, I wouldn't necessarily say BRF S.A. is a value stock today, although I understand the Q1 enthusiasm.