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3 Stocks Worth a Look in the Thriving Agriculture - Products Industry

The Zacks Agriculture - Products industry will benefit from upbeat commodity prices and solid demand for food supported by a growing population. Increasing consumer awareness regarding food ingredients and preference for healthier alternatives will continue to aid the industry’s growth prospects. Alternative agricultural technologies like hydroponics and vertical farming are also expected to be key catalysts, given their inherent benefits.

Players like Bunge Limited BG, CalMaine Foods CALM and Arcadia Biosciences RKDA are poised well to gain from strong demand in their end markets and the ongoing growth initiatives.

Industry Description

The Zacks Agriculture – Products industry comprises companies that are either involved in storing agricultural commodities or distributing ingredients to others, or engaged in farming of crops, livestock and poultry products. Some are engaged in purchasing, storing, transporting, processing and selling agricultural commodities or products derived from the same. They operate grain elevators where space income is earned on commodities bought and sold through the elevator or held as inventory. Some companies provide nutrients, advanced indoor and greenhouse lighting, environmental control systems and accessories for hydroponic gardening, the method of growing plants using mineral nutrient solutions in a water solvent, instead of soil. A few players are also offering innovative, plant-based health and wellness products. Companies producing lumber also fall under this industry.

Trends Shaping the Future of the Agriculture - Products Industry

Solid Demand to Support Industry: Demand for food is directly influenced by population and demographic changes besides income growth and income distribution. Per UN estimates, the global population will surge to 8.5 billion in 2030 and 9.7 billion in 2050. This would lead to an increase in global food demand by 50%. Also, in response to growing consumer demand for healthier food alternatives, a number of agricultural and food-based companies are investing in innovation and augmenting their product and market strategies to bring new quality and healthy food ingredients to the market. Ongoing improvements in grain-handling techniques and investment in larger storage spaces should also aid the industry’s growth. Plus, considering that the industry’s products are always in demand, irrespective of the condition of the economy, stable earnings across all cycles are ensured.

Hydroponics & Cannabis Are Key Catalysts: Hydroponics is gaining popularity as it gives growers the ability to better regulate and control nutrient delivery, light, air, water, humidity, pests and temperature in an indoor setting. It can help produce crops faster with higher yields than traditional soil-based growers. It is currently being utilized in new and emerging industries, including the cultivation of cannabis and hemp. Vertical farms producing organic fruits and vegetables also utilize hydroponics due to a rising shortage of farmland as well as environmental vulnerabilities. Also, vertical farming is the latest agricultural technology where companies use shelves and artificial light to grow produce, minimizing land and water consumption. Total sales for the hydroponic equipment industry are projected to surpass $16 billion by 2025. Even though the cannabis industry is currently going through a rough patch due to an oversupply, its long-term prospects are intact. In the United States, several states legalized cannabis for medical or recreational use, representing the largest market in the world. By 2027, spending on legal cannabis is expected to reach $47.3 billion in North America.

High Costs to Hurt Margins: Players in the industry are currently facing rising labor, packaging and distribution costs, among other expenses. Fertilizer prices spiked after Russia invaded Ukraine as both countries are major fertilizer producers. Companies engaged in animal products have been facing rising production costs for a while as feed ingredient prices remain stubbornly high. Continued corn and soybean upward pricing pressures and further market volatility are expected to flare up feed costs. The industry continues to navigate a tight labor market with a spike in wages and higher distribution costs due to steep fuel prices. Supply-chain headwinds are also expected to stay in the near term. The companies are consistently implementing cost-reduction actions and pricing strategies to sustain margins in the current scenario.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Agriculture - Products industry is part of the broader Zacks Basic Materials  sector. The industry currently carries a Zacks Industry Rank #42, which places it in the top 17% of the 248 Zacks industries.

The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates bright prospects in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic about this group’s earnings growth potential. The Agriculture – Products industry’s 2022 earnings estimates have improved 19% since the beginning of this year.

Before we present a few stocks worth considering for your portfolio, let’s look at the industry’s recent stock market performance and valuation.

Industry Versus Broader Market

The Zacks Agriculture – Products industry has underperformed its own sector but outperformed the Zacks S&P 500 composite over the past 12 months. Stocks in this industry have fallen 7.6% in the past 12 months compared with the S&P 500’s decline of 21.2% and the Basic Materials sector’s decrease of 7.1%.

One-Year Price Performance

Industry's Current Valuation

On the basis of the trailing 12-month EV/EBITDA ratio, a commonly used multiple for valuing Agriculture - Products stocks, we see that the industry is currently trading at 8.96X compared with the S&P 500’s 11.62X. The Basic Materials sector’s trailing 12-month EV/EBITDA is 7.62X. This is shown in the charts below.

Enterprise Value/EBITDA (EV/EBITDA) Ratio (TTM)

Enterprise Value/EBITDA (EV/EBITDA) Ratio (TTM)

Over the last five years, the industry has traded as high as 49.82X and as low as 4.27X, with the median being at 8.39X.

3 Agriculture - Products Stocks to Keep an Eye on

CalMaine Foods: The company has been delivering solid performance courtesy of high average selling prices and record specialty egg sales volumes aided by strong demand. Consumer demand for shell eggs heading into the holidays has seasonally been high. Meanwhile, outbreaks of highly pathogenic avian influenza continue, fueling concerns over consistent supply access, thereby supporting prices. Preference for specialty eggs, including cage-free eggs continues to be on the rise, and consumers are willing to pay premium prices for these products. Specialty eggs remain a focal point for CalMaine Foods’ growth strategy, in line with this evolving customer demand. Also, 10 states have passed legislation or regulations mandating minimum space or cage-free requirements for egg production or mandated the sale of only cage-free eggs and egg products, with implementation spanning from January 2022 to January 2026. CALM is thus investing in acquiring and constructing cage-free facilities, and focusing on expansion projects, including cage-free facilities.  Its disciplined M&A approach focused on consolidation of operations to increase dozens of eggs sold will also remain a key growth catalyst. The stock has gained 67% over the past year.

Jackson, Mississippi-based CalMaine Foods is the largest producer and distributor of fresh shell eggs in the United States. It sells most of its shell eggs in the states across the Southwestern, Southeastern, Mid-Western and Mid-Atlantic regions of the United States. The Zacks Consensus Estimate for CALM’s earnings for fiscal 2023 is currently pegged at $8.76, suggesting growth of 222% from the year-ago actual. The estimates have moved 8% north in the past 30 days. CALM has a long-term estimated earnings growth rate of 20% and a Zacks Rank #1 (Strong Buy), currently.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Price & Consensus: CALM

Bunge: The company has been benefiting from higher global commodity prices following the onset of the Ukraine-Russia war, which exacerbated an already tight commodity supply environment. Shares of Bunge have gained 9.6% over the past year. BG sees additional growth opportunities in its core oilseed processing and origination business, backed by continued demand for its products, including renewable feedstocks. There also exists an immense potential to grow its specialty fats and oils and plant-based proteins businesses. With its broad portfolio of oils and recent investments in plant-protein ingredients, Bunge caters to some of the leading companies in this category. The company continues to invest, build on its global platform and leadership in core oilseed business, and invest in innovation to benefit from the expanding market.

Bunge is an integrated global agribusiness and food company covering the farm-to-consumer food chain. The Zacks Consensus Estimate for this St. Louis, Missouri-based player’s ongoing-year earnings has been stable at $13.89 over the past 30 days. The estimate suggests year-over-year growth of 7.4%. BG has a trailing four-quarter earnings surprise of 18.7%, on average. It carries a Zacks Rank #2 (Buy) at present.

Price & Consensus: BG

Arcadia Biosciences: The company has been streamlining its business to focus on higher-margin brands, which included divesting the Saavy Naturals brand and its manufacturing facility. Backed by these efforts, the company reported gross margin of 28% in the third quarter compared with 9% in the second quarter of 2022. This validates its ability to grow the business while keeping costs under control. The company launched GoodWheat Pasta nationwide both in retail and online, in June 2022. It is an innovative and healthy addition to the pasta category and the only product on the market made with Arcadia's proprietary non-GMO wheat grain. It has been well received by customers and over the past six months, RKDA  has made it available in more than 1,000 retail locations coast-to-coast, doubling distribution. GoodWheat pasta, along with Zola and ProVault, are expected to be key growth catalysts for the company. RKDA also introduced Project Greenfield, a 3-year plan to unlock its potential and create a path to profitability. It aligns with Arcadia’s goals to drive shareholder value, including GoodWheat’s retail expansion, progress in its core brands and partnerships, and development of its next-generation wellness products, in line with evolving customer needs. The company’s shares have lost 75% in a year, but are expected to trend up eventually, backed by these tailwinds.

Arcadia is a producer and marketer of innovative, plant-based health and wellness products. RKDA used non-genetically modified advanced breeding techniques to develop its proprietary innovations, which it is now commercializing by selling seed and grain, food ingredients and products, hemp extracts, trait licensing and royalty agreements. The Zacks Consensus Estimate for this Davis, CA-based player’s fiscal 2022 earnings has been steady at a loss of 74 cents per share. RKDA has a trailing four-quarter earnings surprise of 16.1%, on average and currently carries a Zacks Rank #3 (Hold).

Price & Consensus: RKDA

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Bunge Limited (BG) : Free Stock Analysis Report

CalMaine Foods, Inc. (CALM) : Free Stock Analysis Report

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