Commodities permabull Jim Rogers recently said he foresees $150/per barrel oil. Then there's his well-known distaste for the U.S. dollar and his love off all things agriculture. With that in mind, we decided to look at some names in the commodity space that we think Jim Rogers would consider. Here’s what we came up with, plus some commentary on each.
The Mosaic Company (MOS) With a market capitalization just over $34 billion, this giant of the fertilizer world is prepared to feed to the soil that grows the world’s agricultural diet. Why would Rogers like it? It vertically integrates the production of two of the three core inputs, potash and phosphate, that go into its fertilizer product. Despite a very bullish run in the past year, as recently as late January, RBC Capital Markets reiterated its outperform rating for the company. However, we believe shares are overvalued on a discounted cash flow basis, and investors would be advised to add a position on a pullback.
CNOOC Limited (CEO): CNOOC has averaged a 26.3% return on equity over the last five operating years and the company sports a PEG ratio around 0.6. Shares yield 2.4% with a modest 35% payout ratio. The company maintains four areas of production in China at Bohai Bay, Western South China Sea, Eastern South China Sea and the East China Sea. Further, the company also maintains offshore production in Indonesia. Upstream assets operate in Nigeria, Australia and throughout China. At year-end 2009, the company's net proved reserves totaled 2.68 billion barrels of oil equivalent with net production of 624,000 per diem. CNOOC subsidiaries include CNOOC China Limited, CNOOC International Limited, China Offshore Oil of Singapore. CNOOC Finance which provide ancillary regional services to the parent company.
CF Industries Holdings Inc. (CF) CF Holdings is a smaller player with a regionally concentrated market in the central United States. CF is another fertilizer name that has steady growth prospects for the long term. Its 5-year projected EPS are 8.5%. it should be noted that it, like others in the sector, the company has experienced a marked run up in its stock price recently.
Chesapeake Energy Corporation (CHK): Chesapeake Energy Corporation focuses on developing conventional and unconventional natural gas reserves onshore in the U.S. Carl Icahn was also a buyer during the most recent reporting period. The company sports a beta of 1.33, a trailing P/E of 13.35, and a forward P/E of 11.22. Profit and operating margins currently stand at 18.94% and 28.71%. Recently, BHP Billiton (BHP) paid $4.75 billion for Chesapeake Energy Corporation’s gas assets in the Fayetteville shale formation
Gazprom (OGZPY.PK) Opportunely seizing on the theme of Mideast instability, Alexey Miller, Chairman of the Gazprom Management Committee stated “The situation emerging in foreign markets makes the South Stream project even more essential, desired and ever timely.” The Russian name that's synonymous with energy, Gazprom, has just joined forces with another: Lukoil (LUKOY.PK). The companies will cooperate in natural gas extraction and delivery from the Bolshekhetskaya Depression and the Northern Caspian Sea. Additionally, the company is making major progress on its Sakhalin facilities. Broadly speaking, Gazprom is a direct buy into Russian oil and gas at this moment.
Monsanto (MON): Monsanto, with a market cap of $36.41B, is one of the largest agricultural product companies in the world. The firm offers chemicals and genetically modified seeds to boost farm production across a wide variety of crops. Although the stock is currently trading at a somewhat expensive P/E ratio of 32.95, the company has top-notch profitability, with an operating margin of 16.01%. The company also has a ROE of 11.28%, and offers a $1.12 (1.70%) dividend.
In addition to rising food prices, there are a few factors that appear to be in Monsanto’s favor. First of all, Monsanto has a global presence, and should benefit from increased food demand in emerging markets, especially Latin America, where Monsanto has already experienced significant growth. Second, low investment in agriculture over the last decade means that products like Monsanto’s will become more important to improve farm productivity. Finally, Monsanto has always been at the forefront of agricultural breakthroughs, and currently has nine products in the developmental pipeline.
Exxon (XOM): With a market cap of just over $400B, Exxon is the largest company in the world. Trading at a P/E of 13, the energy giant pays a $1.76 (2.10%) dividend. Exxon is undoubtedly a leader in the energy business, and operates at an above-average 12.01% operating margin. Over the last 12 months, XOM also has an outstanding 23.43% ROE, better than 90% of the companies in the industry. If the Fed decides to withdraw QE2, we think Exxon will survive, as we wrote here.
Potash (POT): Another agricultural giant, Potash has a market cap of $46.57B. Smart money investors such as David Einhorn like it. The stock is trading at a 27.54 P/E ratio, and offers a $0.29 (0.50%) dividend. Over the last year, POT has an unbelievable 38.03% operating margin that is among the best in the industry, with a 27.28% ROE.
Primarily a fertilizer producer, Potash should benefit from many of the same factors as MON and other agricultural product companies. That is to say, reduced farm productivity and increased food demand in developing countries will help boost profits moving forward. Goldman Sachs also just upgraded its rating on POT to “buy”, saying that Potash may have the most favorable demand prospects among the fertilizer group.
Agrium (AGU): Agrium, which offers agricultural products and services, has a market cap of $13.96B and pays a small dividend of $0.11 (0.10%). Trading at a 19.53 P/E ratio, the company has a 9.32% operating margin and 14.68% ROE. Agrium also has a low valuation in terms of forward PEG, at only .6. The company is coming off of a record fourth quarter in 2010, when its quarterly earnings quadrupled those of Q4 in 2009. Additionally, Agrium has been active in taking over smaller companies, which should help it take advantage of rising food prices in the future. Agrium will benefit from the same factors mentioned for other chemical companies, namely increased global demand for food.
ATP Oil and Gas (ATPG): ATPG is an offshore oil and gas production company, with a market cap of $950.58M. The company was hit hard by the Gulf drilling moratorium, and as a result had negative earnings last year. Nonetheless, ATPG was just awarded the third deepwater drilling permit in the Gulf of Mexico, and will resume drilling this week at its well 90 miles south of Louisiana. ATP owns 100% of the well, and will use its ATP Titan drilling platform for drilling. Additionally, despite the negative earnings, the company had positive EBITDA of $208.44M over the last year. ATP has also made a push into Israel for drilling opportunities due to the slow permitting in the Gulf of Mexico, and could benefit from this diversification. Click here to read more on ATPG and the important permitting updates which will continue to help this offshore driller.
Chevron (CVX): Chevron is another large, diversified oil and gas company. With a market cap of $210.48B, the stock pays a $2.88 (2.90%) yearly dividend and is trading at an 11.06 P/E ratio. The company has strong earnings, with a 13.51% operating margin, and also has an impressive 19.29% ROE over the last year. The company currently has more than enough cash to cover its total debt, and has experienced solid growth lately. Like Exxon, Chevron made a big move into natural gas with its multi-billion dollar acquisition of Atlas Energy. Finally, the company has exposure to many potential high growth opportunities, both in emerging markets and within alternative energy.
MarketVectors Agribusiness ETF (MOO): This ETF is a good way to buy exposure into the agricultural space that diversifies your company-by-company allocation, as it is strongly geared toward the big names of the industry. Its top holdings include, in order, Monsanto, Potash, Mosaic, Deere & Co. and Singapore-traded Wilmar International. Indicative of the interest in the sector generally, the daily volume of MOO shares has spiked significantly over the past month and half.
Deere (DE): Deere, maker of tractors and other agricultural and forestry products, has a market cap of $38.57B, and is trading at an 18.40 P/E multiple. The company offers a $1.40 (1.60%) dividend and has shown a ROE of 37.03% over the last year.
As a cyclical stock, continued economic recovery would only boost DE, even after the strong recovery that the stock has already shown. If more good news about the economy keeps piling up, the stock should continue its rise. On March 10th, Deere announced major new investment in Russia, one of the four main emerging market nations. The company could see major growth through this investment, as Russia is a huge country with tons of land available for farming and forestry. Finally, as with other agriculture stocks, DE should benefit from increasing food prices, since higher farming margins will more easily allow farmers to invest in new machinery.
Syngenta Corp. (SYT) With over 4 billion dollars of cash on hand and a one-year forward EPS projection of nearly 25% Syngenta is a solid name. This Swiss company competes in two major agricultural arenas: Crop protection and seed production. It is an underdog amongst the more established genetically-modified seed producers, Monsanto and DuPont (DD). It may well be this underdog mentality that drives it to continue its aggressive investment in R&D and succeed in closing that gap and sating global appetites.
Archer-Daniels Midland Company (ADM): Archer-Daniels' income and revenue have jumped nearly a third YoY, with a 5-year EPS projection of a very steady and respectable 8%. The company is heavily involved in ethanol so investors strongly committed to this play or those simply looking to add a bit of ethanol exposure to their books without direct commodities investments might be attracted to this venerable name.
Brasil Foods S.A. (BRF) Brasil Foods distributes thousands of products to over 100 countries. It is a leader amongst Brazilian food companies. To the many consumers of its frozen food products it is more commonly known by its public-facing name of Perdigao. With a middle class constituting a majority of the population for the first time in Brazil, it bodes well for demand of the pre-made meals on offer.
Disclosure: I am long XOM.