Food prices at the grocery store continue to rise as food manufacturers pass on commodity price increases. Corn continues to climb while wheat and other grains have stabilized near record highs. Political unrest in the Ivory Coast continues to threaten cocoa prices and coffee commodity costs have driven coffee producers to take one increase after another. Sugar prices (like corn) appear to be benefitting from potential diversion to ethanol use.
While we believe food commodity prices will stabilize, we see them remaining at above trend pricing for the near term. So which agriculture companies are benefiting from these record high food commodity costs? Our screen uses IBD’s (Investor Business Daily) ranking for the top companies and the top sectors. The agricultural sector is currently the number 3 in sector strength behind energy and real estate with a 8% gain in 2011(Don’t see the logic behind the real estate strength but go figure).
Our top picks in the Ag sector are as follows:
Deere & Co. (DE): Leading farm equipment manufacturer with the strongest brand name and customer loyalty. Farmers are flush with cash and expecting a strong harvest. This leads to upgrading their equipment including tractors, combines and other farm equipment. Deere just experienced a technical breakout and is poised to report strong earnings. Deere has a market cap of $41.5B with eps expected to rise + 29% and sales growth of +24% for this quarter. It sports a PEG (Price Earnings to Growth) of 1.69 which is a little high but we expect it to beat and raise guidance.
IBD Rank 97 overall rating, 94 EPS rating, 88 Relative Strength.
LSB Industries (LXU): Leading manufacturer of agricultural chemicals and climate control pumps and valves. Just reported strong quarter and should benefit from farmers seeking to drive yield. LSB has a market cap of $851mm with EPS expected to rise +742% and sales +142% for the next quarter. Its PEG is 1.19 and should go lower as analysts raise earnings guidance. Wait for some weakness to get in but should benefit from the long term trend for grain commodity inflation.
IBD Rank 95 overall rating, 94 EPS rating, 98 Relative Strength.
CF Industries (CF): Leading fertilzer company competing against the big boys Potash (POT) and Mosaic (MOS).The fertilizer sector has been strong as prices rise and demand increases as farmers continue to push to increase planting acreage and drive yields. It has a market cap of 9.9B with EPS growth of +130% and sales growth of +142 % expected for the next quarter.PEG is a reasonable 1.14.
IBD Rank 93 overall rating, 94 EPS rating, 87 Relative Strength.
Bunge (BG): Top grain miller, oil seeds producer and grain processor in more than 30 countries. It also sells fertilizers in North and South America. Bunge has a market cap of $10.9B with EPS growth of +187% and sales growth of +15% expected for the next quarter. Their PEG is currently 1.25 with higher growth expected in the future.
IBD Rank 79 overall, 78 EPS, 73 Relative Strength.
Potash (POT): Top fertilizer company along with Mosaic. Should continue to benefit from increased plantings and the drive for improved yields especially outside the US. Expected EPS growth +61% and sales growth of +29%. Potash has a market cap of $51.5B and a PEG of 1.25.
IBD Rank 92 overall, 98 EPS, 89 Relative Strength.
Lindsay (LNN): Leading manufacturer of irrigation and farm equipment. Just reported a strong quarter that pushed the stock price up substantially. Lindsay is another company that is benefitting from cash rich farmers willing to invest in the future. Lindsay has a market cap of $1.0 B with expected growth of +70% EPS and sales growth of +29% for the next quarter. Its PEG stands at 1.51 and this too should come down as estimates are raised.
IBD Rank 93 overall, 74 EPS, 95 Relative Strength.
AGCO (AGCO): Another leading farm equipment manufacturer. Agco has a market cap of $5.2 B with EPS growth of +208% and sales growth of +21% expected for the next quarter. Its PEG also stands at 1.51
IBD Rank 91 overall, 94 EPS, 88 Relative Strength.
Needless to say the farm equipment, grain milling and fertilizer segments of the agricultural sector remain attractive for investors for the long term. Look to get in on weakness as most of these stocks have had some nice moves over the last month. Also don’t expect commodity prices to keep climbing. Remember the old adage: "High prices solves high prices”.
However at current levels 2011 could be the year of the farmer. Long term, agricultural companies should do well as the need to feed the world will continue and these companies should prosper.
Disclosure: I am long DE.