Where to Shop for Agri-Related Stocks
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Having already reviewed a number of grocery-store stocks, I decided to look further into the market for home-cooked foods, specifically companies that sell processing-related commodities and farm produce. Several companies are notable for their earnings prospects, healthy balance sheets, and attractive P/E valuations.
Lets review some of the top names in this group.
Commodity giant expanding through Australian buyout
When Archer Daniels Midland (NYSE: ADM) reported first-quarter results in May, it also agreed to purchase Australian grain processor and handler GrainCorp for $3.4 billion. The pending acquisition provides the oilseed and corn-processing company an enhanced presence internationally, including in the Middle East, Africa, and Asia.
Archer Daniels Midland itself is likely to have achieved higher share earnings in the second quarter on a year-over-year basis. It is likely generating improved results from its corn-processing business, consisting of ethanol production. Importantly, margins on ethanol production have probably improved, thanks to reduced industry inventory balances, less competition from imports, and steady demand. On a negative note, its agricultural-services unit is realizing negative impacts from drought conditions that are likely temporary.
Accordingly, the stock, recently at a 52-week apex, appears to be a good selection. Completion of the GrainCorp acquisition should allow for accretion to share profits, given its solid profitability and the fact that Archer is funding the deal with cash. In fact, it appears to be reducing its long-term debt, a factor that should further lower interest costs, as well as provide added liquidity that may be used for additional acquisitions or other investments. I believe the shares could gain steam from closure of the transaction.
Brazilian company thanking fuel business for rapid growth
Cosan (NYSE: CZZ) is a Brazilian conglomerate that derives the majority of revenue from its fuel-distribution business. Management expects improved volumes attributable to better market conditions and the acquisition of new stations. Cosan had already greatly expanded its fuel (ethanol) operation through the creation of a joint venture with Royal Dutch Shell and is in the process of re-branding stations.
The current price of Cosan shares might well present a buying opportunity. The stock has sold off substantially from earlier this year. The forward P/E is about 9.3x, with fiscal 2014 (ends in March) share earnings forecast at $1.66 a share. This would represent a sizable increase from the fiscal 2013 tally.
Joint ventures also supporting a solid profit upturn at this company
Bunge (NYSE: BG) is another company benefiting from the rising demand for agricultural commodities utilized in the production of ethanol, as well as strength in its food and ingredients business. Joint ventures during 2012 have helped it to build its oilseed production and biodiesel production businesses. It has also been active on the acquisition front, including the purchase of a wheat mill in Mexico.
More importantly, Bunge is experiencing a turnaround in profitability at its sugar and bioenergy operation, owing to favorable weather and development of its plantation.
As a result, based on a solid second half of the year, Bunge could well be on track for a better-than-50% share-net advance in 2013.
Shares are thus a good choice to rebound from a price decline, leaving the stock's P/E at a reduced level of about 9.1x forward earnings based on a 2013 share net of $7.36.
Several of the companies involved in the agricultural commodity market are poised for improved performances in the second half of 2013. Driving growth should be increased demand for ethanol, as well as benefits from joint ventures related to that product. Moreover, some of these stocks have fallen to more attractive levels and could well be on the cusp of recovering.
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Damon Churchwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!