* All data are as of the close of Wednesday, October 15, 2014.
While the Basic Materials sector has been running pretty much par for the course since the start of the economic recovery after the 2008-09 financial crisis, the largest three North American Agricultural Chemicals companies have put in a split performance, as noted in the graph below.
Where the broader market S&P 500 index [black] has grown some 178% and the SPDR Basic Materials sector ETF (NYSE: XLB) [blue] has gained about 150% since the recovery began in early March of 2009, two of our three Agricultural Chemicals companies - U.S.-based Monsanto Company (NYSE: MON) [purple] and Canada-based Potash Corporation of Saskatchewan Inc. (NYSE: POT) [orange] - have spent most of the last 5.5 years below the sector average, rising a mere 45% and 40% respectively. Meanwhile, the largest of the three - E. I. DuPont de Nemours and Company (NYSE: DD) [beige] - has seeded a bigger crop that has grown some 310% over the same period.
On an annualized basis, where the S&P broader market has averaged 31.88% per year and the Basic Materials sector fund XLB has averaged 26.87% per year since March of '09, Potash has averaged a mere 7.16%, Monsanto has averaged a comparable 8.06%, while DuPont has averaged a bumper 55.52% per year!
While the Basic Materials sector is expected to struggle against the S&P broader market for the rest of this year and 2015, the space should outperform the broader market meaningfully over the next five years, as noted in the table below where green indicates outperformance and yellow denotes underperformance.
The outlook for the Agricultural Chemicals industry within the Basic Materials sector, however, is vastly superior, as it is expected to more than triple the S&P's average earnings growth for Q3 and Q4 of this year. Though the industry will slow some going forward, it is still expected to outgrow the broader market by more than 50% in 2015 and beyond, as tabled below.
Within the Agricultural Chemicals industry, our three highlighted stocks of DuPont, Monsanto and Potash are expected to lag considerably behind their industry peers this Q3 and Q4, while lagging moderately in 2015 and beyond, as depicted below.
Compared to the broader market S&P 500 index, our three highlighted stocks are expected to outperform in 2015, as tabled below. But over the next five years, two of them - DuPont and Potash - are expected to slip behind, while Monsanto is seen growing lusher.
With solid dividends ranging from 1.9% to 4.4% per year, stability during times of market turmoil and reasonable growth going forward, all three stocks will continue to hold a place in many portfolios as solid mature investments with long-term benefits. But how do they compare against one another, and which makes the best investment?
Let's answer that by comparing their company fundamentals using the following format: a) financial comparisons, b) estimates and analyst recommendations, and c) rankings with accompanying data table. As we compare each metric, the best performing company will be shaded green while the worst performing will be shaded yellow, which will later be tallied for the final ranking.
This comparison may help investors plan ahead of DuPont's Q3 report due October 28th.
A) Financial Comparisons
Market Capitalization: While company size does not necessarily imply an advantage and is thus not ranked, it is important as a denominator against which other financial data will be compared for ranking.
Growth: Since revenues and expenses can vary greatly from one season to another, growth is measured on a year-over-year quarterly basis, where Q1 of this year is compared to Q1 of the previous year, for example.
In the most recent reported quarter, Monsanto's revenues were the only ones that grew, while DuPont's and Potash's dried out and withered away. Since Monsanto's quarterly earnings growth was not available, the metric will not factor into the comparison, although it is still worth noting that Potash's earnings withered as well.
Profitability: A company's margins are important in determining how much profit the company generates from its sales. Operating margin indicates the percentage earned after operating costs, such as labor, materials, and overhead. Profit margin indicates the profit left over after operating costs plus all other costs, including debt, interest, taxes and depreciation.
Of our three crops, Potash had the widest of margins, while DuPont had the narrowest.
Management Effectiveness: Shareholders are keenly interested in management's ability to do more with what has been given to it. Management's effectiveness is measured by the returns generated from the assets under its control, and from the equity invested into the company by shareholders.
In returns on assets and on equity, Monsanto's management team harvested the greatest yield tending their fields, while DuPont and Potash split the lowest yields between them.
Earnings Per Share: Of all the metrics measuring a company's income, earnings per share is probably the most meaningful to shareholders, as this represents the value that the company is adding to each share outstanding. Since the number of shares outstanding varies from company to company, I prefer to convert EPS into a percentage of the current stock price to better determine where an investment could gain the most value.
Of the three companies here compared, Potash provides common stock holders with the greatest diluted earnings per share gain as a percentage of its current share price, though the others are not far behind.
Share Price Value: Even if a company outperforms its peers on all the above metrics, however, investors may still shy away from its stock if its price is already trading too high. This is where the stock price relative to forward earnings and company book value come under scrutiny, as well as the stock price relative to earnings relative to earnings growth, known as the PEG ratio. Lower ratios indicate the stock price is currently trading at a cheaper price than its peers, and might thus be a bargain.
Among our three combatants, DuPont has the cheapest stock price relative to forward earnings, Potash has the cheapest relative to company book value, while Monsanto has the cheapest relative to 5-year PEG. Monsanto stock is also the most overpriced in the other two categories.
B) Estimates and Analyst Recommendations
Of course, no matter how skilled we perceive ourselves to be at gauging a stock's prospects as an investment, we'd be wise to at least consider what professional analysts and the companies themselves are projecting - including estimated future earnings per share and the growth rate of those earnings, stock price targets, and buy/sell recommendations.
Earnings Estimates: To properly compare estimated future earnings per share across multiple companies, we would need to convert them into a percentage of their stocks' current prices.
All three of our specimens take first place in earnings percentages over current stock price in at least one time period, with DuPont ranking first in two. Monsanto, however, ranks last in three of the four periods.
Earnings Growth: For long-term investors this metric is one of the most important to consider, as it denotes the percentage by which earnings are expected to grow or shrink as compared to earnings from corresponding periods a year prior.
For earnings growth, all three of our farmers are expected to grow a good earnings crop at various times: DuPont in Q3, Potash in Q4 and 2015, Monsanto over the next five years. Yet Monsanto is expected to shrink in Q3, while DuPont and Potash are expected to lag behind Monsanto over the next five years.
Price Targets: Like earnings estimates above, a company's stock price targets must also be converted into a percentage of its current price to properly compare multiple companies.
For their stocks' price targets over the coming 12 months, each company scores a different best: Potash scoring best high target as a percentage of its current price, Monsanto scoring best mean target, DuPont scoring best low target or least downside risk. DuPont is expected to have the least upside potential, while Monsanto is believed to possess the greatest downside risk, with Potash not far away.
Buy/Sell Recommendations: After all is said and done, perhaps the one gauge that sums it all up are analyst recommendations. These have been converted into the percentage of analysts recommending each level. However, I factor only the strong buy and buy recommendations into the ranking. Hold, underperform and sell recommendations are not ranked since they are determined after determining the winners of the strong buy and buy categories, and would only be negating those winners of their duly earned titles.
Of our three contenders, Monsanto is best recommended overall with 8 strong buy, 12 buy and 4 hold recommendations representing 32%, 48% and 16% of its analysts. DuPont is next best recommended with 3 strong buys, 4 buys, and 12 holds, while Potash comes least recommended with 4 strong buy, 1 buy, and 24 hold ratings.
Having crunched all the numbers and compared all the projections, the time has come to tally up the wins and losses and rank our three competitors against one another.
In the table below you will find all of the data considered above plus a few others not reviewed. Here is where using a company's market cap as a denominator comes into play, as much of the data in the table has been converted into a percentage of market cap for a fair comparison.
The first and last placed companies are shaded. We then add together each company's finishes to determine its overall ranking, with first place finishes counting as merits while last place finishes count as demerits.
And the winner is… too close to call for practical purposes, as all scored very close to one another. Technically, though, the win goes to Monsanto, outperforming in 11 metrics while underperforming in 10 for a net score of +1. Potash places second, outperforming in 10 metrics and underperforming in 10 for a net score of 0. Crossing the finish line last though still very close behind is DuPont, outperforming in 9 metrics and underperforming in 11 for a net score of -2.
While the Agricultural Chemicals industry is expected to outperform the S&P broader market overwhelmingly this Q3 and Q4, and substantially in 2015 and beyond, the three largest North American companies in the space seem poised to lag behind their industry peers - modestly in 2015, but meaningfully over the next five years.
Yet compared to the broader market S&P, Monsanto is seen outperforming the other two as well as the broader market, contributing to its win in today's competition.