Stormy Agricultural Headwinds Give Buying Opportunities

Includes: AGU, CORN, MON, MOS
by: Dutch Trader

Agriculture companies have been in crashing mode recently. Fertilizers, crop protectors and seeds makers are still an attractive investment for the years to come.

Agri investors with a longer-term view of more than several months know that longer-term trends will dominate (secular trends concerning food scarcity, demographics, climate change, industrialization) and short-term moves provide buying opportunities.

Important issues

  • Parallel to the situation in 2008, where a sharp sell-off of Agro related stocks and of grain prices was immediately followed by a steady uptrend, you would expect the same to happen in this correction phase.
  • Low investment in increasing agricultural output has been in place for many years and the catch up trend keeps being interrupted by fears that investments may not pay off. This led to very low inventory levels in 2009 and 2010 and will happen again if current investment in higher yields (by applying fertilizers, crop protectors and especially now new Biotech seeds) is stopped.
  • The latest USDA report is one reason for the shorter-term oriented farmers to halt investment, with more inventory shortfalls as a consequence in the months ahead.
  • Why were inventories so much higher all of a sudden in September? No one knows, since no factual explanation was given by the USDA; inventories are counted on estimates for both supply and demand, not on hard facts. Let's face it : who is going to check the contents of grain silos in the Midwest US plains, let alone in the Chinese countryside on a monthly basis? It is possible that October reports will show much lower inventories again, moving in line again with the annual trend.
  • Pricing for the main crop, corn, is still at almost double the levels seen a year ago, so a slight correction based on fears for demand destruction is not unusual.

Three companies are worthy to buy on dips and provide enough opportunity for the near future.

Company Ticker Price 3M(%) YTD(%) P/ECurrYr P/ENxtYr DivYield
AGRIUM AGU 68.18 -23.6 -25.7 7.3 7.2 0.2
MONSANTO MON 66.25 -10.2 -4.9 20.9 17.7 1.9
MOSAIC MOS 52.18 -24.1 -31.7 8.7 7.8 0.4

Agrium (NYSE:AGU)

Agrium reported very strong results for Q2 2011 with EPS up by 39% to USD 4.54 and sales up 40% to USD 6.2 bln on higher fertilizer demand and pricing and very good demand for seeds in its retail business.

Mike Wilson, CEO, states: "Crop markets and crop nutrients markets remain tight." (Meaning, that grain inventories are at very low levels and fertilizer demand cannot be met by current supply.)

This was all achieved in a quite difficult quarter for agro chemical makers as plantings had to be delayed due to very bad weather conditions globally (too wet in the West, too dry in the Middle and the East).

Besides being highly profitable with very high free cash flows, Agrium is also an active acquisition seeker, doing deals in Australia and South America lately.

Strong results with more to come in H2 as the South American season starts and China imports even more grains. Agrium is a solid company with less volatile earnings than some of its peers due to the 50% exposure to Retail.

Mosaic (NYSE:MOS)
Mosaic reported better-than-expected figures for the last quarter of its fiscal year 2010/11, with an EPS of 1.52 per share earned and USD 1.38 anticipated by consensus. Revenue rose by 54% to USD 2.86 bln with USD 2.6 bln expected.

Higher prices and solid demand for fertilizers N (phosphate) and P (potash) were the main reasons here. Prices for phosphate rose by 31% year-over-year (YoY) in this latest quarter; potash prices rose by 20%.

The outlook for the first quarter of the fiscal year 2011/12, remains very upbeat with demand for global fertilizers high, according to CEO James Prokopanko.

The balance sheet is also improving (short term debt - 72%, LT - 39%) rapidly.

Mosaic is in the process of de coupling itself from Cargill, which held a 64% stake in Mosaic.

This gives price pressure to the shares from time to time, but once a stand alone operation, Mosaic can become much more profitable and use its strong balance sheet for more acquisitions.

On the basis of consensus 2011/12 estimates the shares now trade at a PE of 8.7x, falling to 7.8x for the following fiscal year. Cash flow is very high at an estimated USD 6.50 per share for 2011/12 (EPS at USD 5.77 est.) This will allow for more acquisitions (hard to find though, mainly to be found among competitors) or for share buy backs.

In the end, the attractiveness of the underlying assets is what drives the share prices of specialized fertilizer makers like Mosaic, Potash Corp. (NYSE:POT) and Agrium.

Monsanto (NYSE:MON)
Monsanto published Q4 numbers for its broken book year 2010/11. These were better than expected at an EPS loss (seeds companies make money in the spring and summer).of 22 cents with minus 27 cents estimated.

  • Guidance for the next quarter (also typically a weak one) is now raised to an EPS of 10 to 15 cents with 8 cents anticipated. For the fiscal year 2011/12, an EPS of USD 3.34 to 3.44 is now guided for with consensus at USD 3.42. The main reason here is the good demand situation in Latin America. This implies an annual growth rate for EPS of some 16%.
  • Sales in Q4 reached USD 2.25 bln.
  • Biotech Seeds prices are set to rise by 10% in 2011/12.
  • Comments by Hugh Grant, CEO of Monsanto: "It is clear that we have turned a corner and returned to growth mode."

Good numbers with a very confident outlook by management for the year ahead. Valuation is in line with growth at 17x 2012/13 but margin expansion is set to accelerate as new biotech seeds come to market.

Balance sheet strength is assured with high free cash flows generated.

It's a stock for future increased demand trends for agricultural products, food, feed and for bio-based materials and bio fuels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.