Consider These 7 Agriculture Stocks

January 18, 2018

Consider These 7 Agriculture Stocks

  • As with any sector we analyze, the differences in valuations are staggering.
  • However, this offers the opportunity to position oneself in stocks that have nothing to do with the economy but will benefit from a rising global population and increased food consumption.



Introduction

Yesterday we discussed how the agricultural sector provides an interesting situation thanks to the limited downside and high potential upside due to positive structural trends.

Today, to dig deeper into the matter we are going to discuss 7 agricultural stocks to see where can you find the best value, inflationary protection, and defensive stocks for your portfolio.

Monsanto (NYSE: MON)

Monsanto is in the process of being acquired by Bayer (OTCPK: BAYRY) for $128 per share. There are many regulatory approvals needed, but it will probably close as the companies may sell assets to adhere to regulations.

Nevertheless, the acquisition shows what the value of an agricultural business is to a private owner. As there is always consolidation in the sector, we can expect other businesses to be taken over at similar valuations.

MON hasn’t seen revenue growth for the past 5 years, 10-year average earnings are $3.88 which leads to a cyclically adjusted price to earnings (CAPE) ratio of 33. Book value per share is $15 which shows that Bayer isn’t really buying assets here.

What can be seen from MON is that whenever such a business gets into trouble, you can expect a buyer to snap it up. As soon as MON’s stock price dropped a bit in the 2015/2016 commodity crisis, Bayer took advantage of it and isn’t paying much more than the average 2014 stock price.

Figure 1: MON’s 5-year stock prices. Source: CNN Money.

Deere & Company (NYSE: DE)

DE produces agricultural machinery and is therefore extremely cyclical. What’s interesting is that the stock has more than doubled in the last two years.

Figure 2: DE’s stock price in the last 5 years. Source: CNN Money.



The surge in the stock price is thanks to DE’s current and future expected growth. DE has seen a huge improvement in sales and orders which will probably push earnings to $8 in 2018. However, as was the case in 2012 and afterwards, it’s difficult to predict when this growth will stop and revert. When it does, DE might even have earnings of $10 and trade at a PE of 10 which would give a price of $100. Thus, there is plenty of upside but there’s also plenty of downside with DE. Further, the book value is just $30 and it doesn’t really give much safety.

Mosaic Company (NYSE: MOS)

What would a list of agricultural stocks be without fertilizers? However, the situation in the sector isn’t at all positive.

Fertilizer prices are still way below what they were just a few years ago.

Figure 3: Potash prices are still 40% below 2014 highs. Source: Fertilizer Weekly.

Higher historical prices have led to significant investments which have increased supply while demand hasn’t really expanded as expected. In such an environment, where it isn’t clear when fertilizer prices will rebound, the key is to invest in the lowest cost producer or at least in a company that is profitable no matter what happens. Mosaic is profitable, but the earnings are 4 times lower what they were in 2014. When the fertilizer environment rebounds, MOS will definitely be a winner but until then, we could see a continuation of the stock’s price decline.

Figure 4: MOS’s stock price in the last 5 years – down 54%. Source: CNN Money.

Nevertheless, if the situation improves in the coming years as the company expects, MOS could really be a winner in your portfolio as it is the largest global combined potash and phosphate producer.

Figure 5: MOS expects faster demand growth than supply growth. Source: MOS.

For those who are patient, MOS could be a very good long term investment as demand for food and therefore for fertilizers is definitely growing. Unlike the above mentioned companies, MOS’s book value is close to its stock price.

Archer Daniels Middland (NYSE: ADM)

I briefly mentioned ADM in yesterday’s article and today we will dig deeper into the stock.

The attractiveness of a company like ADM is that it has nothing to do with the cyclicality of the economy but only with the cyclicality of food prices. This is thanks to its food processing businesses.

Figure 6: ADM’s business model. Source: ADM.

However, despite the lower revenue due to lower food prices, ADM has still managed to keep earnings stable and pay a growing dividend.

Figure 7: ADM’s dividend. Source: ADM.



A company that is profitable even in an environment with low food prices could only do better with higher food prices. Therefore, ADM is definitely a company to keep an eye on. The book value of $31 isn’t far from the stock price of $40.

Nutrien  – Agrium & Potash Merger (NYSE: NTR)

NTR was recently formed from the merger of Agrium and Potash Corporation of Saskatchewan. Both companies have been doing well, but have seen their earnings fall in the several last years. Potash even lowered its dividend. However, Potash had to sell its stake in the Chilean Lithium producer SQM which is expected to bring in about $5 billion, or 30% of its former market cap.

The companies expect synergies coming and the main key is a rebound in fertilizer prices. Until that happens, the stock might be a little overpriced but as those are cyclicals, it’s always better to buy them when cheap. By cheap, I mean a low stock price.

CF industries (NYSE: CF)

CF is another fertilizer company, but this one is focused on nitrogen products. However, the same forces apply to that sector with demand for fertilizers expected to grow in the future by around 2% per year while new significant production additions aren’t expected as low fertilizer prices don’t incentivize new supply.

Figure 8: Nitrogen fertilizer supply growth. Source: CF.

CF’s stock price is already higher from its recent lows as the company remains profitable and pays a strong dividend.

Figure 9: CF’s stock price has doubled from its 2016 lows. Source: CNN Money.

There is still room for a higher stock price, but what happened to CF shows what can happen to other fertilizer stocks as the cycle reverts.

Bunge Limited (NYSE: BG)

BG is another interesting food stock like ADM that simply does what it does which is processing food, mostly soy, grains, and oils. As long as food prices remain low, BG’s margins will also be tight but as mentioned already, it’s a growth sector in a cyclical downtrend. BG will see its market significantly increase in the future.

Figure 10: Demand for food will grow slowly and steadily. Source: BG.



With a CAPE ratio of 14, BG looks like another relatively cheap defensive stock.

Conclusion

Investing in agricultural stocks now, at least in those that are fairly priced, is one example of how temporal diversification works. If you buy into stocks that won’t go bankrupt but are in a downtrend, you would have a portfolio full of wonderful business after a decade.

The fertilizer producers described above and food processing companies might be the real winners in the next ten years as there will definitely be a recession and perhaps even high inflation.



By Sven Carlin Agriculture Investiv Daily Share: