4 More Agricultural Companies for Your Watch List
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Successful long term investing comes from investing in a “needs based business” with high barriers to entry and low valuations. Agricultural companies serve in providing for the basic human need of nourishment. Setting up a company to compete with them would involve massive amounts of capital and know how. Most of the agricultural companies below don’t meet the valuation criteria. However, they deserve a place on your watch list.
Seed and crop productivity
Some agricultural companies specialize in seed and optimizing crop production by keeping pests under control. These companies achieve this through seed biotechnologies and chemical treatment of pests and weeds.
Seed and crop production company, Monsanto (NYSE: MON), boosted its overall sales 21% in its most recent quarter. Revenue in the seed segment increased 14%. A sharp increase in corn prices, robust demand from Latin America and the United States contributed the most to the increase. Its agricultural productivity segment increased revenue 30%.
The company sports a good balance sheet. Cash and short term investments comprise 40% of stockholder’s equity. Total debt to equity stands at 81%, a hair below my personal threshold of 85%.
Monsanto’s free cash flow grew 46% versus the same quarter last year.
Monsanto feels good about the future including the short term. It raised its EPS guidance range to $4.31 and $4.41 from $4.18 to $4.32. If corn prices sustain current levels this EPS guidance could come to reality.
Briefly, valuation wise Monsanto’s P/E ratio of 24 resides in the high range.
Competitor, Syngenta (NYSE: SYT) grew its sales 6% in the most recent quarter. Rapid technological adoption and high crop prices in Latin America also served as catalysts for revenue growth. The company saw expansion in Eastern Europe also saw rapid expansion with 20% growth in sales.
Syngenta’s latest balance sheet reveals an excellent cash position with cash to stockholder’s equity of 29%. It leans a little heavy on the liability side with total debt to equity clocking in at 130% above my personal threshold of 85%.
Syngenta’s outlook specifically highlights the potential in Latin America. Mark Mack, the CEO, expects margin expansion and EPS growth at the close of its fiscal year 2012.
Also, Syngenta’s P/E of 23 is a little high.
Another beneficiary of the corn price rally, American Vanguard (NYSE: AVD) increased its sales 23% in its most recent quarter. A pure crop productivity play, the vast majority of American Vanguard’s revenue growth comes from corn insecticides. The insecticide segment grew 60% this last quarter.
American Vanguard’s cash position stands at 11% of stockholder’s equity. Its total debt to equity ratio stands at 85% of stockholder’s equity right at my personal threshold.
Its free cash flow resides in the negative at $1.8 million. American Vanguard invested heavily in expanding manufacturing capacity; an affirmation of its faith in the future. This shows the company feels demand will increase greatly in the future.
Mr. Market assigns American Vanguard a rich P/E of 28.
And don’t forget the fertilizer
Fertilizer producer and a member of Canpotex, Mosaic (NYSE: MOS) benefited from robust domestic demand for its potash fertilizer during 2012, growing its North American sales by 41% in its most recent quarter. Overall, sales declined 16%. Notably, Mosaic sits in an enviable cash position. Its $3.4 billion in cash represents 26% of stockholder’s equity. Its total debt to equity clocks in at a low 33%.
The new agreement between Canpotex and China will boost Mosaic’s short term prospects on the international scene. Mosaic predicts a record 2013 year.
Mosaic sports a low P/E of 14.
In brief, stellar increase in corn prices and Latin American economic expansion contributed to the fortunes of the aforementioned companies. In the short term, corn prices and global trade will play a role in the continued rallies of the agricultural sector. Long term trends in increased access to food in growing emerging economies will drive long term stock price growth. On the whole, these companies belong on your Motley Fool watch list (log-in required).
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