Despite Market Negativity, Agribusiness Companies Keep Performing Strongly
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The chart from Yahoo Finance compares returns over the last three months for PowerShares DB Agriculture Fund (NYSEMKT: DBA) and Market Vectors Agribusiness (NYSEMKT: MOO), the ETFs that track agricultural commodities prices and shares of agribusiness stocks, respectively.
Both instruments have been falling in tandem recently -- they usually move in similar ways, but many companies in the agro sector have been reporting very strong financial figures. Lower stock prices in a context of solid financial reports ... it looks like there may be a buying opportunity in the agribusiness sector.
The fall in commodity prices as reflected in DBA is probably more related to currency movements and investor sentiment than fundamental considerations. The European financial crisis has generated an appreciation of the US dollar versus other currencies as investors seek refuge from the increasing global uncertainty, and a stronger dollar is usually bearish for commodities.
Also, when financial markets run away from risky assets, all kind of commodities usually suffer, agro commodities included. A selloff is a selloff, and investors sometimes pay little attention to the underlying fundamentals of the assets in question when they are selling in a hurry.
There is a clear relationship between the prices of agricultural commodities and the earnings of the companies that make the portfolio of MOO. Seed producers like Monsanto and Syngenta, fertilizer companies like Agrium and Mosaic, or machinery manufacturers like Deere and CNH face increasing demand and profit margins when commodity prices are strong and farmers have more incentives to invest in crop improving technologies.
But investors should not overestimate the impact of fluctuations in short-term commodity prices on demand for companies in this business. After all, there can be a big difference between cyclical oscillations and a long-term trend for agro prices.
Furthermore, movements in commodity prices don't necessary reflect levels of demand in related businesses; production has been rising continually through the years in order to feed a growing world population, and demand from countries like China and India has been increasing as people in these countries change their eating habits and increase their calorie consumption.
Deere & Company (NYSE: DE) reported numbers that were quite strong on Wednesday, but shares of this machinery manufacturer were falling by a 2% in a negative day for commodities and related companies in general. From Samuel Allen, the company's chairman and CEO:
John Deere is well on its way to a year of outstanding performance after reporting an eighth consecutive quarter of record earnings. Our results are a reflection of positive conditions in the global farm economy, which is continuing to show impressive strength and endurance. Deere is gaining new customers throughout the world, who are responding with great enthusiasm to our innovative lines of equipment.
The company has been sliding into bargain territory lately, trading at a forward P/E below 9 and yielding a 2.3% in dividends. Such a valuation for a company that is reporting record results and surpassing analysts’ estimates sounds like a nice entry point from a long-term perspective.
Fertilizer company Agrium (NYSE: AGU) is another interesting alternative with strong financial performance and a discounted valuation. The company reported a 23% increase in revenues for the last quarter and, although earnings per share increased at a slower rate of 11%, the number was also better that expected by analysts. At a forward P/E of 8.5, shares of Agrium are trading at tempting valuation levels.
One more fertilizer play with a strong performance and a cheap valuation is CF Industries (NYSE: CF), which reported a 30% increase in sales and 42% more in earnings per share during the last quarter in comparison to the previous year. The company is not only benefiting from strong demand for its products, but lower natural gas prices are also helping margins since natural gas is a production input for CF. At a forward P/E of 7.8 there is plenty of upside potential in shares of this fertilizer producer.
As long as agro commodities keep declining due to uncertainty regarding the global economic scenario, these stocks and financial markets in general probably will remain under pressure. On the other hand, this is the kind of situation in which long-term opportunities are usually born, and it looks like one is appearing in agribusiness companies.
acardenal has no positions in the stocks mentioned above. The Motley Fool owns shares of CF Industries Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.