Why Agriculture Stocks will Outperform?
The inflation in the food prices is set to continue globally. The demand is rising faster than the supply can keep pace and in 2007 and 2008 there were riots in 60 countries due to run up in the prices of corn, wheat and soybeans. There are many drivers behind the rising food prices. Primary among them being the increased demand from China and diversion of agricultural resources to produce biofuels.
The result is a changing industry dynamic as established players continue to jockey to lock in supplies of essential grains and position themselves as a supplier to China. For example, the recent bid from the Japanese trading house Marubeni to acquire the US based grains merchant Gavilon (a spinoff from Conagra Foods), is squarely aimed at getting a footing in the Chinese supply channel. On the other hand, we have global giants such as Bunge investing heavily in Sugar production in Brazil for the Ethanol market.
Agriculture has the potential to be one of the most promising investment themes for the coming decade (sorry Facebook investors!). Here are some of the selected stocks that you can use to play the agriculture theme.
Nitrogen based fertilizer companies are benefitting from a glut of natural gas, that makes their input costs low, and increased fertilizer demand rising out of a good season of corn plantings in 2012 and solid projections for 2013. In addition to the food applications, corn is also being increasingly used for corn based ethanol projects.
CF Industries: One of the largest US company in this space is CF Industries (CF). The company also makes phosphate based fertilizers. The stock is currently cheaply valued at 7.55 forward P/E and 0.63 PEG. The company has a 25% profit margin and pays a 1% dividend yield.
Terra Nitrogen LP: Terra Nitrogen LP (TNH) is a subsidiary of CF Industries and operates as a MLP. If you want a pure play in the Nitrogen based fertilizers to get a direct exposure to low natural gas prices, TNH is a good option. As an MLP, it pays out 8.1% distribution yield. Please note that this income is not a dividend but a partnership income and the tax treatment is generally more advantageous but could be troublesome if held in a tax deferred account. The trailing P/E is 11.21 and its profit margins are about 36%
Rentech Nitrogen Partners LP: Rentech Nitrogen Partners (RNF) is another nitrogen based fertilizer producer that recently came public in Nov 2011 and could be worth a look. It is a smaller company, with market cap of $861 million. Its distribution history is not long enough yet, but it has paid out $1.06 in May this year and has forecasted a total distribution of $2.86 for the year, which if met, gives an yield of 12.7%. The PE is a respectable 9.5 on a forward basis
Grains and Trading
Bunge Limited: Bunge (BG) has been in business trading agricultural commodities worldwide for close to 200 years now. Additionally, the company operates sugar and biofuels, milling and fertilizer blending divisions. The company is valued at $9B in the market with annual revenues of $60 B. Its forward P/E is 8.22 and the stock is priced at 77% of the book value. The company pays 1.6% in annual dividends.
Archer Daniels Midland Company: Archer Daniels Midland (ADM) is essentially the big brother to Bunge, operating in similar segments globally. It also writes crop insurance. At a forward P/E of 10, the stock is a little more richly valued, however ADM has better operating margins (2.58% vs 1.64% for Bunge) and pays a 2.2% dividend. The stock is at 116% of the book, so there are obvious tradeoffs between BG and ADM and you may choose ADM if you prefer income over capital appreciation.
Seeds and Chemicals
DuPont: DuPont (DD) of course is a much diversified company with interests in seeds, agricultural chemicals, electronics, biosciences, pharmaceuticals, etc. If you are looking for an exposure to the agriculture sector with a stock that represents a more diversified business, DuPont fits the bill. The stock is reasonably priced at 12.85 times trailing earnings and pays a 3.5% dividend.
Monsanto: The much maligned seeds giant, Monsanto (MON) stock has gone nowhere in the last 3 years as its earnings have stagnated. The stock is still priced richly at 20 times trailing earnings. It is expected to post a 11% growth in the next 5 years. So this is not really a good value, but if you are interested in its 1.7% dividend yield which the company continues to increase, you may want to consider MON for a long term holding.
AGCO: AGCO (AGCO) manufactures farm equipment and machinery such as tractors, spreaders, balers, grain storage bins, etc and their replacement parts. The $4 B company has a trailing P/E of 6.06 and has shown a 50% EPS growth in the most recent quarter. The stock is also seeing some large insider buying.
Deere & Company: Deere & Company (DE) is another, and larger, farm machinery company that has seen significant revenue and earnings growth. The stock can still be purchased at 8.5x forward earnings and the company pays a 2.5% dividend. The company is forecasting a record demand for its products this year and has boosted its profit outlook.
Agriculture is a sector that we do not have an exposure to in the VSG Portfolio and one of these stocks will be a great addition for a medium to long term holding. Further due diligence is in progress and the recommendation will be made to the members over this weekend.