American Vanguard: Strong Agricultural Prospects Should Help Overcome Debt

I love stocks that slip under the radar. Small companies many investors have not heard of, selling at a value. Even better, they may be positioned within sectors that are off and running, like agriculture.

Those who have read my stuff know that I have been bullish on the fertilizer and seed companies for some time now. Some stocks I like better like Potash Corp. (POT) and others that trade at a value like Compass Minerals (CMP), and there are also areas that are being ignored, such as agricultural chemicals. Just like seeds and fertilizer, insecticides and other chemicals are seeing increased pricing power. They have been ignored as farmers in the United States and Canada prefer to purchase seeds that are genetically altered to be resistant to insects, fungus, etc. The reason that we are still seeing a large demand for these chemicals is that many countries do not allow some or all of the technologies that are offered by companies such as Monsanto (MON). Investors anticipate that countries such as China will allow these technologies, but I believe they will continue to use chemicals until they develop their own.

American Vanguard Corp. (AVD) seems to be well positioned going forward. Tight supplies of agricultural commodities have pushed prices upward in corn, soybeans, etc. These higher prices have caused an increased production and in turn, a need for more fertilizer and chemicals. As I believe that pricing is headed even higher, chemical prices will continue to see the same. This is due to the four F's: food, feed, fuel and fiber. Seeds with genetic changes should help these compounds as many different types of lands will be able to be planted as drought resistance is addressed. Also, they have begun to develop a partnership with Monsanto and should see additional benefits going forward.

When consolidation starts, it's 'eat or be eaten', and AVD has decided to pull up a chair to the dinner table. They have acquired quite a few chemicals since 1989 - 22 to be precise. Dacthal has not only been built back into the market as it was discontinued in 1998, but also has a 40% price increase. Metam has a 60% market share through better marketing and sales.

Even though this company has a very small market cap ($339 million) they are diverse. Their products handle a broad exposure including 27% corn, 23% vegetables, 16% potatoes, 13% specialty, 12% cotton and 9% tree fruit. AVD's first position for growth is with corn, as they are working on resistance management, yield enhancement and impact to the current marketplace. In 2007, a host of Big Ten schools did research on AVD's Smartbox CSI used in conjunction with CRW corn traits and found it increased production by 12 bushels per acre than just using the seed alone. One comparison was as high as 18 bushels per acre. Their IMPACT herbicide has been approved for use with Roudup ready products, and has no known weed resistance helping to control glyphosate resistant weeds.

Even though domestic markets will not allow for major growth in upcoming years, international markets look to be an area of focus. In 2005, AVD's international sales were 7.9% of total sales. In 2006, that number increased to 8.9% and last year 15.2%.

Currently this stock has pulled back from its 52-week high of $20.30 and is now setting at $12.82. This has brought the forward PE down to 12. Growth estimates have the company growing 16.2% this year and 30.4% next year. The only downside to the company is their debt. This is mainly from their acquisitions, but with the bright future in agriculture, their stock could take off.

Disclosure: Long MON

Comments

[SN:]

Can you please explain how you found the 60% market share?

Do you mean the metam sodium market?

Thank you.

2008 Jun 23 03:50 PM