By Michael Bigioni
The agriculture sector has many components to it and each is not necessarily dependent on the other from year to year in terms of stock price and earnings. Farmers may have a great year and not see the need for investing in more fertilizer or better machinery. On the other hand they may have a bad crop year and decide to invest heavier in fertilizer for higher yields the following year while neglecting to upgrade equipment. We are going to look at 3 sectors of the agriculture industry: a potash (fertilizer) miner; a seed supplier; and an equipment manufacturer.
Potash Corp. of Saskatchewan (NYSE:POT) is a high profile company that has made major headlines in recent years. It was the target of a foreign takeover bid in 2010, which was vetoed by the Canadian government. Foreign investors have since been circling the waters looking for opportunities to get into Canada’s rich potash sector, but so far there has been talk with no action. POT is a leader in an industry that has seen stability, as of late, in sales and projected growth.
POT currently trades at around $48, well under their target price of $65. It has a 52 week range of $39.54 - $63.97. The 50 and 200 day moving averages are $48.49 and $53.77 respectively. The averages are trending up and the stock price is up from its lows of under $42 at the beginning of October. The company continues to grow improve its revenue and earnings figures. Annual revenue was $6.54 billion last year and is projected to reach $8.14 billion for December 2011, a 24.4% increase.
Analysts are expecting revenue to actually come in at $8.68 billion which would mean 32.7% growth. Revenue is predicted to continue climbing for 2012 where analysts forecast a $9.89 billion year in sales. Earnings per share are also seeing positive numbers and are expected to come in at 3.32, up from the previous year’s 2.04, a 62.7% increase. Again, analysts expect real earnings to be higher and come in at 3.68, a staggering growth of 80.4%.
POT is steadily increasing both its earnings and revenue, but earnings are growing at a much higher rate indicating the company to be in good control of operating costs. With over $16 billion in assets, the company sits in a healthy financial position. It has over $394 million cash and a debt to equity ratio of 0.61. Its return on equity sits at 38.4%. Current market capitalization is around $40.5 billion on 856.39 million shares outstanding while the company’s value is estimated to be closer to $45 billion. POT has a trailing dividend of $0.24 and a forward dividend of $0.28.
Monsanto Company (NYSE:MON) is a large provider of seeds to farmers and is heavily involved in research to provide better products which are tolerant to adverse conditions. Since its inception in 1901 the company has become a global powerhouse in the agriculture industry. It has, however, come under scrutiny for aggressive litigation, “strong-arming” tactics, political lobbying and genetic engineering. The company has become a target for some activists, never the less, it continues to perform well financially and research into genetic engineering hasn’t stopped.
MON currently trades around $71, under their target price of $82. It has a 52 week range of $57.56 - $72.68. The 50 and 200 day moving averages are $68.59 and $67.20 respectively. The moving average has been flat. The stock price has jumped from lows of $60 at the beginning of October, but has since been relatively flat for most of the month. The company shows steady growth in both its revenue and earnings.
Annual revenue was $11.82 billion in 2011 and analysts project revenue to be $12.71 billion in 2012, a 7.5% increase. Earnings per share continue to grow and analysts expect them to come in at 3.44 for 2012, up from the previous year’s 2.96, a 16.2% increase. Analysts expect earnings to continue to climb in 2013 predicting earnings per share of 4.00.
MON is steadily increasing both its earnings and revenue, with earnings growing at a higher percentage than revenue. With nearly $20 billion in assets, the company sits in a healthy financial position. It has over $2.5 billion cash and a liability to equity ratio of 0.7. Its return on equity is 15.16%. Current market capitalization is around $38 billion on 535.1 million shares outstanding while value is estimated to be closer to $38.5 billion. MON has a trailing dividend of $1.11 and a forward dividend of $1.20.
Deere and Company (NYSE:DE) is a provider of products and services to the agriculture industry. Since its inception in 1837, the American company has grown to become the leading global supplier of farm equipment. DE has a stellar reputation in the industry.
DE currently trades around $75, under their target price of $89. It has a 52 week range of $59.92 - $99.80. The 50 and 200 day moving averages are $71.31 and $79.37 respectively. The moving average has been flat. Like POT and MON, DE’s stock price has jumped from lows of $62 at the beginning of October, but has continued to make a gradual climb since. The company shows steady growth with both its revenue and earnings. Annual revenue was $23.57 billion in 2010 with estimates of $30.6 billion for 2011, a 30% growth.
Analysts project slightly lower figures with earnings estimates of $29.53 billion in 2012, a 26% increase. Earnings per share continue to grow with estimates of $6.08 for 2011, up from $4.66 the previous year, a 30.5% increase. Analysts expect the figure to be come in at $6.38, a 36.9% increase. Analysts expect earnings to continue to climb in 2012 predicting an EPS of $7.02. Next reporting date is November 23, 2011.
DE is steadily increasing both its earnings and revenue, with earnings growing at a higher percentage than revenue. With over $47 billion in assets and over $3.3 billion cash the company sits in a healthy financial position. It has debt to equity ratio of 3.48, higher than MON and POT, but lower than auto manufacturing norms of 5. Its return on equity is 37.98%. Current market capitalization is around $31.2 billion on 413.92 million shares outstanding while value is estimated to be closer to $54.2 billion. DE has a trailing dividend of $1.52 and a forward dividend of $1.64.
Points To Consider
- Market cap is low for both POT and DE. POT’s value is 12.5% more than its market cap while DE’s value is 42% higher than its market cap.
- All are under their target price, but POT is the most undervalued according to analysts’ median and mean target prices.
- Slight growth in earnings and revenue for MON. Strong growth predicted to continue for DE. Very strong growth predicted for POT, particularly with their earnings.
- DE’s stock price is climbing steadily coming up to their earnings report on November 23.
- MON has outperformed both POT and DE recently.
- DE continues to enjoy a strong reputation world wide while Monsanto is a target for some activists.
- DE and MON have growing dividends of over $1 while POT’s dividend is low.
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Going forward I feel that MON has had its run for now and I don’t feel strongly about the stock reaching its target price. While earnings and revenue are both expected to rise, MON will see marginal gains compared to POT and DE. I am also concerned that MON hasn’t really addressed their public image problem. While fighting negative public sentiment may not stop operations, it has some effect financially, whether it comes in the form of delays, court challenges or extra paper work.
While I am generally not a fan of manufacturing companies I like the look of DE for it’s strong reputation, low liability to equity ratio for its sector, good earnings outlook and huge gap between market cap and estimated value. DE looks like a good long haul stock that at the very least will pay out some dividends.
POT has taken a hit this year as have many potash stocks. It is currently undervalued and has a lot of room to go before hitting its target price. The potash sector needs a to breakout of this slump soon and POT has room to grow. I like this stock for the short term. As always, do your own due diligence.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.