Five Agribusiness Stocks to Plant the Seeds of Long Term Profits
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The agribusiness sector will be benefiting from several powerful tailwinds over the following years including rising income levels in emerging markets, record levels of global liquidity and important demographic trends. Like if that weren´t enough, the sector offers many interesting opportunities in high quality companies trading at attractive valuations. There are good motives, both from a macroeconomic perspective and from a company level point of view, to consider a long position in agribusiness stocks for the long term.
Countries like China and India have joined the global trade markets for good, and they are demanding more and better food as part of their development process. The economic cycle has its ups and downs in emerging markets like everywhere else, but it’s hard to imagine demand for food from these countries going down in the long term.
Besides, global population is increasing: the United Nations estimates that world population is expected to increase by 2.3 billion, passing from 7.0 billion to 9.3 billion between 2011 and 2050, a material increase in a relatively short period of time. There are many uncertainties regarding the possible effects of demographic growth on different areas of the global economic landscape, but these new people will much likely need some food in their stomachs.
According to the same organism, the urban areas of the world are expected to absorb all the population growth expected over the next four decades while at the same time drawing in some of the rural population. As a result, the world rural population is projected to start decreasing in about a decade and there will likely be 0.3 billion fewer rural inhabitants in 2050 than today.
The world is becoming more populated, and urban landscapes are becoming an increasingly bigger presence versus rural areas, which means that more food will need to be produced with less land and fewer human resources. This sounds like good news for companies providing technology and resources to the agribusiness industry.
Another factor to consider is the strong effect that global liquidity infusions could have on commodity prices over the following years. The US, Europe and Japan are embarked in aggressive monetary policies to reignite their uninspiring economic growth rates, and this should have bullish consequences for commodities, since the supply of money is growing much faster than commodity production.
Due to several combined trends, the agribusiness sector is exceptionally well positioned for gains in the middle and long term, and companies like Deere (NYSE: DE) could be interesting vehicles to benefit from the enthusiastic perspectives the sector is offering. The company has a solid leadership position in the agro machinery industry, and it’s investing smartly for growth in emerging markets by building production facilities in countries like Brazil and China.
The machinery business can be quite volatile, and the company is seeing slowing growth in the last quarters, but Deere has managed to report positive earnings numbers through the ups and downs of the businesses cycle over the past years, so the business model has proven quite resilient. Shares of Deere are trading at a modest P/E ratio of 11, which leaves ample room for gains from a valuation point of view.
Deere has an undisputable leadership position in the US and Canada, but AGCO (NYSE: AGCO) is a serious competitor in emerging markets, reaching a market share of 50% in a high growth market like Brazil, for example. The company also owns 25% of TAFE, an Indian tractor manufacturer, which distributes AGCO's Massey Ferguson line throughout India, another key emerging market. Carrying a P/E ratio around 6.5, the company looks really attractive from a valuation point of view, but the risk in AGCO is also much higher than in Deere due to its smaller size and weaker competitive position.
Higher demand for agricultural products should provide a healthy tailwind for Archer Daniels Midland (NYSE: ADM), which is a global leader in the food origination, distribution and processing business. The company has been hurt by the severe drought affecting US farmers in the last year, so it should see better times ahead as the industry recovers from climatic factors. ADM trades at a P/E ratio near 14.5, which is a reasonable valuation for an industry leader in a strong business.
If farmers are going to produce more food with fewer resources over the next decades, they will probably need to spend some serious money in fertilizers and other crop improving products, and this is good news for companies like Potash (NYSE: POT) and Mosaic (NYSE: MOS), the two biggest players in the fertilizer industry.
The fertilizer business can be quite volatile due to fluctuating product prices and changing inventory policies at the distributor level, but none of this has stopped these two companies from growing their earnings and delivering juicy returns for their shareholders over the last years. At a P/E ratio of 13.5 for Mosaic and 15.3 for Potash, both companies have room for further gains in a positive scenario for fertilizer demand.
There are several factors which bode well for the agribusiness industry on a long term basis, at the same time; these companies are offering strong business models and attractive valuation levels. The ground is fertile and the weather looks encouraging, so maybe it’s a good time to plant the seeds of long term profitability by investing in agribusiness stocks.
acardenal has no positions in the stocks mentioned above. The Motley Fool owns shares of Archer Daniels Midland Company. 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.