Agribusiness Companies: 3 Options

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The agribusiness commodity industry is on the growth track again after the severe drought that affected the U.S. and part of South America last year. Lower production and higher prices greatly affected the companies in the sector. Now, with a better outlook and some adjustments in stock value, some companies may become more interesting.

Let’s analyze how three major agribusiness producers are performing.

Better crush margins in Brazil, and higher prices for ethanol, promise a better 2013

Bunge (NYSE: BG) is an integrated global agribusiness and food company. The company processes, produces, moves, distributes and markets food on five continents. Bunge’s latest first-quarter results show an EPS of $1.15, over the market’s estimations of $0.95 and $0.57 a year ago. The main reason behind this result is an out-performance in Brazil, where the company enjoys high margins in the soybean crush, plus logistical advantages (mainly, a relatively higher use of trains). Higher ethanol prices and lower inventory costs helped increase the overall performance as well.

The company posted a net income of $14.78 billion, a 14.5% increase, compared to $12.9 billion in the same quarter of 2012. Gross margins increased to 4.4% from 4.1% for the same period last year. Bunge is optimistic about a high demand for its produce, as its chairman and CEO, Alberto Weisser, stated: “Customer inventory pipelines are lean and in need of restocking, so demand should remain strong. Farmers in South America are responding with record production.” The management expects a good development of sugar crops as well, based on improvements in weather conditions in central-southern Brazil, and early readings of ATR, the sugar content in the cane.

EBITDA growth is 45.6%, the maximum in ten years, and higher than 72% of its 646 competitors in the industry. The company’s cash-to-debt ratio of 0.418 is almost at its historical highest as well. Other signs are also promising for Bunge, as new government energy policies in Brazil will carry positive results for its ethanol. I believe Bunge will remain competitive due to its asset platform and presence in South America, and as long as demand for agricultural commodities remains strong.

Better Cashflow and capital efficiency, but best results will have to wait

Archer Daniels Midland (NYSE: ADM) is one of the largest agricultural commodity companies. It sources corn, soybeans, wheat, and cocoa through farmers, processes these materials through its refineries, and creates value along the chain.

The U.S. drought, farmers’ reluctance to sell in South America, and reduced availability for trucks greatly affected the company’s results. Recent reports showed an EPS of $0.48, below last year’s $0.78. Archer Daniels Midland has faced this situation, and much better results are expected due to a bigger 2013/2014 crop yield in the U.S., and the improvement of ethanol margins.

In 2013, Credit Suisse raised its EPS estimates for the company to $2.46, and $3.02 for next year, although Archer Daniels expects another weak second quarter. The scarcity of the supplies in North American grain, and reduced processing margins in cocoa, are making the company's customers deplete their inventories. In addition, the management considers that ethanol will be “profitable but volatile” throughout 2013, due to a capacity increase by competitors.

Operating cash flow was neutral, despite the fact that Q1 is when payments to farmers are made. Capital expenditure budget is still only $1 billion, when it was in the range of $1.5-$1.8 billion in previous years. However, adjusted WACC has been at 5.3% for the last four quarters.

Even though the outlook is more promising than last year’s, the investors’ eyes should be focused on the next fourth quarter, as that's when the company realizes this year’s crop.

Satisfactory performance, good outlook for crop, but fears of higher government intervention

Cresud (NASDAQ: CRESY) is a Latin American agricultural company, leader in the production of basic agricultural goods, with operations in Argentina, Bolivia, Paraguay, and Brazil. The company is involved in crop production, beef cattle production, and milk production, managing a portfolio of 34 farms reaching almost 1,000,000 hectares.

Cresud’s net income for the first six months of the 2013 fiscal year amounts to $34 million, compared to $4.5 million in the same period of 2012. The urban and rural segments performance secured an operating income of $107 million for the first six months of 2013, a 53% increase compared to the same period of 2012.

The agricultural segment brought positive results for the company, mainly due to the increase in crop prices observed during the period, and the larger areas planted with sugarcane. Crop area was increased 8% year-to-year to 221,000 acres, of which 57% of these are dedicated to soybeans.

EBITDA during the first six months of this fiscal year reached $128 million, 45.5% higher than in the first six months of 2012. The sale of the “Horizontina” farm for a total amount of $38 million (book value was $23 million) contributed to the result.

Cresud is a well-managed company with a good balance sheet. However, the pending ex-dividend payment of $0.504 since November 2012 is generating concerns. This is due to Argentine government authorities not allowing payments of dividends to ADR holders. I believe this a bad sign for investing in the stock, as these restrictions are very likely to continue in the near future.

Bottom line

Very promising soybean sales have just started in South America. USDA projections of 81 million tons of soybean production in Brazil and 55 million tons in Argentina will guarantee good levels of profitability for Cresud and Bunge. Archer Daniels relies on its North American output, which will be realized by Q4. Until then, despite better financials, the company’s results will not impress.

The main foreseeable threat is an unlikely, massive drop in commodity prices. Although large crops are expected in the Northern Hemisphere, I do not see it as a serious threat. On the other hand, logistics could increase costs, but Bunge will be prepared to affront them, as it already has. In the case of Cresud, despite its good management and diversification in Latin America, its exposure to Argentina’s currency instability and increasing restrictions could become a serious threat.

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