3 Agriculture Stocks To Buy Now, 2 To Avoid

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 |  Includes: AGU, CF, MON, MOS, POT
by: Stock Croc

Despite signs of the global economic recovery being underway, many investors are still seeking safe investment havens primarily due to the increased market volatility triggered by the European sovereign debt crisis. This has seen many investors switch to investing in the traditional safe haven of gold, or seek alternative stock market investments in industries that are seen as defensive, such as consumer staples. However, many investors have overlooked other alternative industries that may provide growth opportunities, which are not traditionally seen as defensive investments. One of these industries is agricultural stocks.

With the world population set to grow at a rate of 78 million people per year, reaching 9 billion by 2050, world food production must increase by 70% to meet the demand for food. This has led the United Nations Food and Agriculture Organization to recently warn, that the world could see another food crisis as basis food prices rise further. Furthermore in an interview in March 2011, Jim Rogers expressed bullish sentiments regarding agriculture saying: “Huge bull market in agriculture, Agriculture prices are still extremely depressed on a historic basis. You know, the price of sugar has gone up 600% in the last 6 years. It is still 50% below its all time high. The scope for price increases in agriculture is staggering.”

In this article I will analyze five agricultural stocks to determine whether they represent solid investments, which have strong fundamentals and are capitalize on the growing demand for food and agricultural products, thus driving increases in the stock price growth.

Monsanto Co (NYSE:MON)

Monsanto has a market cap of $38.88 billion and it is trading at around $73, with a price to earnings ratio of 24.50. Its 52 week trading range is $58.89 to $78.71. It reported third quarter 2011 earnings of $2.25 billion, a significant decrease from second quarter earnings of $3.61 billion. Third quarter net income was -$112 million, a substantial decrease from second quarter net income of $692 million. It has quarterly revenue growth of 18.4% and a return on equity of 15.18%.

One of Monsanto’s competitors is Syngenta AG (NYSE:SYT), which has a market cap of $26.98 billion and is trading at around $58.50, with a price to earnings ratio of 17.28. It has quarterly revenue growth of 14.3% and a return on equity of 17.31% and pays a dividend with a yield of 2.8%. Based on these indicators, both companies are roughly performing on par.

Monsanto’s cash position has substantially improved in the last quarter. The balance sheet showed $2.57 billion in cash for the third quarter 2011, an increase from $1.07 billion in the second quarter. The net tangible assets have decreased to $6.87 billion in the third quarter 2011, from $11.85 billion in the second quarter. Monsanto’s quarterly revenue growth of 14.3%, versus an industry average of 25.7%, and a return on equity of 17.31%, versus an industry average of 17.9%, indicates that it is underperforming many of its competitors.

The current outlook for the agricultural chemical industry is cautiously positive. There has been a sustained growth in demand for both fertilizer nutrients and pesticide ingredients, with the majority of that increase in demand coming from the Asia-Pacific region. The ongoing economic development of China bodes well for sustained long term demand, as the amount of arable land decreases and the population increases, requiring increased intensive agriculture to maintain food production levels. The devalued US dollar also makes US exports more attractive and this should bode well for US based manufacturers such as Monsanto.

I believe that Monsanto’s stronger balance sheet and solid performance indicators show that it is well positioned to capitalize on the positive industry outlook. In addition, the company is uniquely placed to capitalize on increased demand in the agricultural sector as it is one of the world’s largest providers of genetically modified seeds. On this basis, despite the drop in earnings and net income I rate the company as a buy.

Potash Corp of Saskatchewan (NYSE:POT)

Potash Corp has a market cap of $36.66 billion and is trading at around $43, with a price to earnings ratio of 12.91. Its 52 week trading range is $39.54 to $63.97. It reported third quarter 2011 earnings of $2.28 billion, an increase from second quarter earnings of $2.25 billion. Third quarter net income was reported at $809.94 million, a decrease from second quarter net income of $813.41 million. It has quarterly revenue growth of 50.5%, a return on equity of 38.35% and pays a dividend with a yield of 0.7%.

One of Potash Corp’s competitors is BASF SE (OTCQX:BASFY), which has a market cap of $68.24 billion and is trading at around $74, with a price to earnings ratio of 8.28. It has quarterly revenue growth of 11.6% and a return on equity of 30.25%. Based on these performance measures it is underperforming Potash Corp.

Potash Corp’s balance sheet has weakened, with$394 million in cash reported for the third quarter 2011, a decrease from $408 million in the second quarter. Potash Corp’s quarterly revenue growth of 50.5%, versus an industry average of 25.7%, and a return on equity of 38.35%, versus an industry average of 17.9%, indicates that it is substantially outperforming many of its competitors.

The earnings outlook for the agricultural chemical industry is cautiously positive primarily due to increased domestic demand driven by early signs of a US economic recovery, although the recovery will be subdued in the short term. In addition, downstream demand for food and food related products is relatively inelastic and this bodes well for those industries, such as agricultural chemicals, that are suppliers of essential products to the food production industry.

In addition, many companies in the industry are engaging in efforts to reduce working capital, optimize their supply chains and improve productivity, which should lead to margin benefits.

Despite Potash Corp’s slight decrease in earnings and balance sheet cash I believe that it is currently a solid investment opportunity due to the positive industry outlook and its strong performance indicators. In addition, the company is currently trading at close to the bottom of its 52 week trading range and I believe that this represents a buying opportunity. On this basis I rate Potash Corp as a buy.

The Mosaic Company (NYSE:MOS)

Mosaic has a market cap of $23.48 billion, and is currently trading at around $52.50, with a price to earnings ratio of 8.59. Its 52 week trading range is between $44.86 and $89.24. It reported third quarter 2011 earnings of $3.03 billion, a substantial increase from second quarter earnings of $2.86 billion. Third quarter net income was reported at $526 million, a decrease from second quarter net income of $649.20 million. It has quarterly revenue growth of 40.9%, a return on equity of 25.74% and pays a dividend with a yield of 0.4%.

One of Mosaic’s competitors is PPG Industries Inc (NYSE:PPG), which has a market cap of $13.41 billion and is trading at around $87, with a price to earnings ratio of 12.94. It has quarterly revenue growth of 11.2%, a return on equity of 30% and pays a dividend with a yield of 2.7%. Based on these indicators Mosaic is outperforming PPG Industries, although both companies have solid performance indicators.

Mosaic’s cash position has improved, with $4.04 billion in cash reported in the third quarter 2011, an increase from $3.91 billion cash in the second quarter. Net tangible assets have also improved to $10.32 billion in the third quarter, from $9.81 billion in the second quarter. Mosaic’s quarterly revenue growth of 40.9%, versus an industry average of 7.8%, and a return on equity of 25.74%, versus an industry average of 29.7%, indicates that it is outperforming many of its competitors on earnings growth but is slightly lagging on return on equity.

As discussed earlier the outlook for the specialty chemical industry is quite positive especially for phosphate producers such as Mosaic. This is due to the phosphate price increasing by over 50% over the last year and increased demand for agricultural chemical. This demand can only increase as the demand for food production increases and the amount of available arable land decreases. Strong demand for both commodities and agricultural products driven primarily Chinese demand, coupled with a weak US dollar that should make US exports more competitive, bodes well for commodities and agricultural chemical producers like Mosaic.

The positive industry outlook combined with increased earnings, a strong cash position and solid performance indicators show that Mosaic is well positioned for growth and is able to capitalize on this ongoing demand. The company is also trading well below its 52 week high and I believe that given the stocks strong fundamentals, this represents a good buying opportunity. Accordingly, I rate Mosaic as a buy.

Agrium Inc (NYSE:AGU)

Agrium has a market cap of $10.86 billion and is trading at around $69, with a price to earnings ratio of 8.22. Its 52 week trading range is $60.15 to $99.14. It reported third quarter 2011 earnings of $3.08 billion, a substantial decrease from second quarter earnings of $6 billion. Third quarter net income was $287.30 million, a substantial decrease from second quarter net income of $704.96 million. It has quarterly revenue growth of 52%, a return on equity of 23.53% and pays a dividend with a yield of 0.20%.

One of Agrium´s competitors is CF industries Holdings Inc (NYSE:CF), which has a market cap of $9.33 billion and is trading at around $140, with a price to earnings ratio of 7.74. It has quarterly revenue growth of 53.1%, a return on equity of 32.82% and pays a dividend with a yield of 1.1%. Based on these indicators it is outperforming Agrium.

Agrium’s cash position has weakened. The balance sheet showed $786.75 million in cash for the third quarter 2011, a decrease from $933.25 million in the second quarter. Agrium’s quarterly revenue growth of 52%, versus an industry average of 25.7%, and a return on equity of 23.53%, versus an industry average of 17.9%, indicates that it is substantially outperforming many of its competitors.

As stated earlier in this article the overall outlook for the agricultural chemicals industry is increasingly positive and this will only improve as the global economic recovery gains momentum, if it is not stalled by the European sovereign debt crisis.

Despite the positive industry earnings outlook, and that Agrium is trading as a price close to its 52 week low, I do not believe that Agrium represents a good investment opportunity at this time. I have taken his view on the basis that the company’s fundamentals do not support strong future earnings growth as it has reported decreased earnings and net income for the third quarter 2011, along with a weaker balance sheet. I believe that there are better investment opportunities in the industry and rate the company as a hold.

CF Industries Holdings Inc (CF)

CF Industries has a market cap of $9.29 billion and it is trading at around $140, with a price to earnings ratio of 7.70. Its 52 week trading range is $115.34 to $192.70. It reported third quarter 2011 earnings of $1.4 billion, a significant decrease from second quarter earnings of $1.8 billion. Third quarter net income was $330.90 million, a substantial decrease from second quarter net income of $487.40 million. It has quarterly revenue growth of 53.1%, a return on equity of 32.82% and pays a dividend with a yield of 1.1%.

One of CF Industries’ competitors is Intrepid Potash Inc (NYSE:IPI), which has a market cap of $1.73 billion and is trading at around $23, with a price to earnings ratio of 16.87. It has quarterly revenue growth of 27.4% and a return on equity of 12.96%. Based on these indicators, it is underperforming CF Industries.

CF Industries cash position has weakened in the last quarter. The balance sheet showed $67.49 million in cash for the third quarter 2011, a decrease from $71.25 million in the second quarter. The net tangible assets have increased to $845.82 million in the third quarter 2011, from $819.17 million in the second quarter. CF Industries quarterly revenue growth of 53.1%, versus an industry average of 25.7%, and a return on equity of 32.82%, versus an industry average of 17.9%, indicates that it is outperforming many of its competitors.

The outlook for the agricultural chemical industry as stated earlier is quite positive, but despite this and CF Industries solid performance indicators, its reduced earnings and net income combined with a weaker balance sheet do not bode well for future earnings growth. Accordingly, I believe there are better investment opportunities in the agricultural industry and rate CF Industries as a hold.

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