3 Agriculture Stocks to Watch in 2013
Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In 2012, drought in the US created havoc in the agricultural sector, resulting in lower yield and increased prices for corn and soybean. The majority of the agriculture equipment makers experienced volatility in their stock prices, affecting investors' return. However, the three agriculture stocks Monsanto (NYSE: MON), Mosaic (NYSE: MOS) and AGCO (NYSE: AGCO) have made a rapid recovery. Rising food demand and the food price inflation present an opportunity to the investors to enter this market. The increasing margins on the crops will allow farmers to invest in better equipment which means higher sales for these companies. Monsanto and Mosaic have already proven their potential by posting increased earnings and beating the consensus estimates, while AGCO has strong fundamentals that will take on a growth trajectory. Let’s have a detailed look at these stocks with their growth prospects.
Impressive Quarter Results
Earnings of this agriculture giant increased by a whopping 170% y/y to $339 million in the fiscal first quarter 2013, as compared to only $126 million in the last year. It also posted impressive EPS of 67 cents, beating the consensus estimate of 37 cents. This top line growth was mainly driven by the sales of its corn seed business in Latin America and the US. Sales from Argentina, Brazil, and Mexico grew 27% as compared to the last year, as the farmers in these regions upgraded to the new Monsanto genetically modified products and the US order book was ahead of the year-ago levels. These strong earnings have raised the future outlook for the Latin American market, where it has larger near term opportunity with 40% share in Brazil in VT Double Pro corn and 50% in Argentina in Triple Pro.
The Rising Opportunity
The next big opportunity which it will be availing from this region is Intacta RR2 Pro soybean. Intacta is a Round Ready 2 Yield soybean which is stacked with a Bt trait for insect protection. The company has planned its trials in 2013 and its launch in fiscal 2014. Intacta is expected to provide Monsanto with good economic opportunity of 100mm acre potential in Latin America, and should offset the legal challenges to royalty collection for the first generation Round Ready Soybeans. Furthermore, it will also help the company in pricing by receiving $20 to $25 per acre royalty as compared to only $3 per acre currently in Brazil whereas it gets nothing in Argentina. If Intacta gets an early adoption of new corn products in Brazil then 2015 and 2016 will be growth years for the company.
The Mosaic Company
The company posted its second quarter fiscal 2013 where the net earnings came at $629 million as compared to $624 million last year with the increased demand from North America and South America. But the net sales were down to $2.5 billion as compared to $3 billion in 2011 due to the low volume of phosphate and potash and because of the low price of phosphate. However with US demand returning, a growth trend can now be observed in 2013 for phosphate and potash. Further, Mosaic has announced that it will be adding around 800,000 mt per year of ammonia capacity to its existing 500,000 mt at its existing Faustina plant site in St. James Parish, Louisana at the cost of $700 million. Louisana has very favorable gas prices at present and also a broad split between the oil and natural gas price is continuing well. These favorable prices will provide an attractive economic environment for the company as it can now produce its own ammonia requirements and reduce its dependency on overseas supply. Its construction is expected to start in 2014 and operation likely to begin in 2016. Mosaic has a strong balance sheet with $3.2 billion which gives an expectation of increased dividend and significant share repurchase program.
2013 looks promising for AGCO as the company has strong long term opportunities available with it. For now there are two strong reasons that keep my interest alive in the company, First, its growth in South America which is growing at a good pace despite the soft weather and second, its expansion plans in South Africa. AGCO expects its sales in South America will be increased from 5% to 10% in 2013 due to the higher sales of tractors and combines in Brazil for harvesting sugarcane. Moreover the company will be developing more advanced technology product offerings like spraying, harvesting and implements at lower cost despite the increased competition. As in 3Q12 this region posted a 9.6% increase in organic sales. AGCO has purchased Santal Equipamentos, a sugarcane company in South America and these sugarcane machines will be sold under the brand name of Valtra as Valtra has a huge market share in South America.
On the other hand, AGCO is targeting South Africa to capitalize on an agricultural boom and make a move towards commercial farming. The company has plans to invest $100 million over the next three years to build tractors, set up model farms for equipment demonstration and teaching modern farming techniques to the farmers. It will also be building smaller parts distribution warehouses which will cost $15 million each in the East and West Africa. AGCO wants to increment its African sales as it generates about 60% of the African sales from South Africa and Morocco. The company is looking forward to achieve its 10% operating margin target in the next three years compared to 9.3% in 2012 and has estimated its EPS to range between $5.50 to $5.75 in 2013.
The Foolish Bottom Line
To conclude, I feel all the three companies are positioned well and are worth considering for long term investment. Monsanto with its near term growth plans and its dividend payment policy of 1.50% increases the investors’ confidence. AGCO’s target of increased operating margin looks achievable while Mosaic’s strong balance sheet for increased dividend gives a sense of security.
madhudube 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!