Value Column von Hans Peter Schupp
29 JANUARY 2025
Riding the pig cycle
Hans Peter Schupp, CEO of Fidecum AG and portfolio manager of the Contrarian Value Euroland Fund (ISIN: LU0370217092) on how investors can benefit from the ups and downs of cyclical sectors.
In his doctoral thesis “The Forecast of Pig Prices”, economist Arthur Hanau described the so-called pig cycle in 1928. If the demand for pigs increases unexpectedly, the required animals must first be reared. Prices initially rise. However, the breeder does not know how high the demand will be when the pigs are ready for slaughter. Often the high prices then dampen demand again. Supply is now too high and prices fall. This mechanism underlines why demand in cyclical sectors is often misjudged, resulting in strongly fluctuating prices, sales and profits.
This is a difficult situation for investors. Nevertheless, we sometimes like to invest in companies in those sectors. Because in times of crisis, it is often not only turnover that is low, but also share valuations. In an upswing, on the other hand, not only sales and profits increase. The higher profits are also valued higher. The price/earnings ratio goes up and the share price is thus boosted from two sides.
The success of cyclical investing is determined by two factors
For such a strategy to be successful, two aspects must be taken into account. The first is of a structural nature. Does the sector only have a short-term demand problem? Or are there more serious, long-term market changes behind it? Once this question has been answered in the affirmative, the focus shifts to the solvency, i.e. the financial substance of the company in question. In a crisis, the weakest market participants are usually eliminated. It is therefore important to identify the likely survivor. This is because they have the opportunity to increase their market share and regularly perform particularly well in the next upturn.
Corona caused an extreme pig cycle in some sectors
The coronavirus pandemic triggered an extreme hog cycle in some sectors. A demand shock led to higher prices in many sectors because supply could not be expanded accordingly in the short term. The sudden need for home office solutions led to a boom in IT services, while demand for vaccines, medicines and medical equipment soared. The need for contactless deliveries drove online retail business. Manufacturers of motorhomes and leisure boats also benefited. They experienced an unprecedented boom.
The afterward hangover
The boom was followed by a hangover. The dramatic impact of a return to normal demand and increased supply on sales, earnings and share price performance can be seen today in the balance sheets and share price charts of many of the companies affected.
Of particular interest to us is the development in the leisure vehicle sector. During the coronavirus years, these were suddenly in extremely high demand. As a result, dealers ordered many more motorhomes and smaller boats than in the past. But these vehicles had to be built first. As a result, orders were mainly delivered in 2022 and 2023. Now, however, the dealers‘ inventories were proving to be too high in view of the fact that demand has since subsided again. Because their warehouses were full to the brim, they drastically reduced their orders. The manufacturers‘ results in 2024 were correspondingly poor. The classic hog cycle had struck.
Bénéteau – an intriguing investment idea
This also affects the French sailing and motorboat shipyard Bénéteau (ISIN FR0000035164). Founded in 1884, the company has always focused on the performance of its boats. The fisherman with the fastest boat, so the message went, would be the first to arrive in port and could sell his catch at the best prices. Today, Bénéteau still stands for particularly high-performance sailing boats, catamarans, motorboats and large yachts.
As early as 2023, the company announced that 2024 would be difficult. From 2021 to 2023, turnover from boats rose by 40 percent from 1.04 billion euros to 1.46 billion euros. This growth was then actually completely lost again in 2024. Turnover collapsed and, at around one billion euros last year, is likely to have been close to the 2021 level again. Meanwhile, the company’s share price halved as a consequence.
Strong fundamentals and professional crisis management
This is not the first crisis for Bénéteau. In its eventful past, the family business has often had to contend with enormous fluctuations in demand and has established a successful internal solution: Question everything, name problems, cut costs, restructure.
In 2024, the boat division still managed to generate an operating profit of between 4% and 6% of turnover. At the same time, the boat manufacturer is now focusing on its core business again. In the good times, Bénéteau had built up an additional, smaller business unit, BIO HABITAT, which manufactures mobile homes. This unit has now been sold. The selling price is not yet known, but according to the company, it is higher than the investment costs of 180 million euros.
Last but not least, Bénéteau has made financial provisions in good time. At the end of 2023, net liquidity already amounted to 230 million euros. Thanks to the sale of BIO HABITAT, it should currently have risen to over 400 million euros.
Favorable valuation and the chance of rising demand in the future
This is an interesting constellation for investors. The market capitalization is currently only 750 million euros. For one billion in profitable sales, investors therefore only pay around 350 million euros after deducting the cash position. In view of the comfortable financial situation, there is even the possibility that the company could pay out a special dividend in a crisis year.
The key question now is: will demand recover in the future? We have noticed that some dealers in the USA have recently increased their orders again. At the beginning of January, we had the opportunity to ask the CEO of Bénéteau whether this indicated that the demand cycle was getting back on track. He explained that this could well be the case in the Sunshine State of Florida, but that a broader upturn would probably not start until the summer. He argued that the boom during the coronavirus crisis had attracted completely new groups of buyers, who had initially only purchased smaller boats. These are now lying next to larger yachts in the harbors. This creates desire and would boost demand for larger boats in the long term.
That convinced us. We started our first investments in Bénéteau last summer and have since expanded them further.
Our investment approach
With our Contrarian Value Euroland Fund (ISIN: LU0370217092), we have remained true to our investment philosophy for 25 years. We invest in undervalued companies with potential and a comprehensible business model. In doing so, we act like an entrepreneur who wants to buy the entire company and – if necessary – deliberately go against the prevailing market opinion.
About the author: Hans Peter Schupp is a managing partner of Fidecum AG and the portfolio manager of the Contrarian Value Euroland Fund.
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