There are two simple facts that form the basis of this article. The world's population is expanding, and with that, the amount of land that can be used to grow food is shrinking. Going forward, we need to increase crop production as well as efficiency, and this is no tough task.
So with the world's food supply needing to constantly rise, why not look at the agricultural sector, and see if we can grow some profits? Let's take a look at Monsanto (NYSE:MON), Potash (NYSE:POT), Mosaic (NYSE:MOS), and Agrium (NYSE:AGU).
As you can see from the table, you are not going to make a ton in these stocks waiting for dividends, although Monsanto's near 2% yield is nice. These names are pure growth companies, and that's the way to think about them. Potash bounced off a new 52-week low on Tuesday, and Mosaic and Agrium aren't too far from their lows either. So let's take a look at their growth potential.
|Revs (2011 est.)||$8.75B||$9.63B||$14.70B||$11.54B|
|Revs (2012 est.)||$9.85B||$9.54B||$14.99B||$12.47B|
|EPS (2011 est.)||$3.73||$4.31||$9.02||$2.87|
|EPS (2012 est.)||$4.48||$5.53||$9.31||$3.42|
*Monsanto's fiscal year ends in August, and Mosaic's ends in May. The Mosaic numbers here are not 100% certain, as Yahoo! Finance has had some problem with international based stocks lately.
Potash has the best combined revenue and EPS growth rates. Monsanto is 2nd, and Agrium is a distant third. Mosaic is last, and I'm not quite convinced those are the actual estimates. But for now, we'll roll with them. I always like growing EPS and revenues, so based off of here, I'm leaning towards Potash. But that could change when we look at some other numbers.
Again, Potash is the clear leader and Monsanto is 2nd. Mosaic is third here and Agrium trails by a mile, although Mosaic's operating and net margin seem quite impressive. I always like a company that can translate its growth to the bottom line.
|P/E (2011 est. EPS)||11.35||11.39||7.20||22.04|
|P/E (2012 est. EPS)||9.45||8.88||6.98||18.49|
This is where Potash loses some of its steam. It appears a bit pricey to its competitors. Those price to sales and book ratios are not good at all. However, a PEG ratio of 1.22 for a solid growth company isn't terrible. Agrium trades extremely cheap here, but as we saw from above, the margins leave a lot to be desired. I do like Agrium and Mosaic here as they have the best all around numbers, but remember, these numbers were based off the questionable estimates above for Mosaic. Potash would be a third choice, and I don't like Monsanto's high P/E ratios.
|Short Term Debt||$1.17B||$14M||$53M||$243M|
|Long Term Debt||$3.89B||$737M||$2.06B||$2.03B|
A good company has a clean balance sheet and is strong financially. Mosaic is definitely in the best shape here, with very low debt and a solid cash position. Monsanto is clearly #2 here thanks to its strong current ratio and large working capital. Agrium is in good shape as well and slots into the third position. I'm not impressed with Potash's short term liquidity numbers here, but they can be improved over time.
I do like all of these names, but if I had to choose one, I'd go with Potash. Although the balance sheet leaves a bit to be desired, I love growth and good margins, and it clearly has the best of both worlds. Monsanto would be by number two over Mosaic, with the 2% dividend breaking a close tie. It also has the growth, but needs to work on its margins.
Mosaic gets my third choice for its strong balance sheet, and what appears to be a decent valuation. I'm not totally impressed with Agrium's all around profile, so it gets my 4th pick, but I think it still could be a buy. That's just what I think, so I'll give you one more table to what the experts think.
The lower the analyst rating number, the better (1=strong buy, 5=sell). As you can see, Potash is their favorite and offers good upside. Mosaic is their number two, offering the most upside. Although one analyst has a sell, Monsanto appears to be their number three, but offers the lowest upside according to current price targets. Although analysts also put Agrium in the 4th spot, they agree it has a fair amount of upside. Stay hungry, my friends.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.