4 Agriculture Operations Stocks to Watch in a Distressed Industry
Higher investment costs and SG&A expense continue to mar the profitability of the companies participating in the Zacks Agriculture – Operations industry. Logistic and supply-chain issues, higher input costs, and elevated operational expenses have been affecting industry players for a while. Supply-chain concerns and commodity cost pressure have been affecting results.
Nonetheless, the industry is poised to benefit from innovations and improved consumer demand for healthy products. Investments in acquisitions, joint ventures and expansions are likely to fortify the prospects of the industry players. Continued investments in assets and technological capabilities to innovate and serve customers bode well for players like Archer Daniels Midland Company ADM, Corteva Inc. CTVA, Adecoagro S.A. AGRO and Limoneira Co LMNR.
About the Industry
The Zacks Agriculture – Operations industry comprises companies that produce or procure, transport, store, process, and distribute agricultural commodities to consumers. It also distributes ingredients to other parts of the agriculture industry (including clothing, animal feed, energy and industrial product). Some industry players engage in dairy operations, land transformation activities and the development of food ingredients using gene-editing technology. The industry encompasses production activities related to traditional farming of crops (like corn, soybean, wheat and cotton), and livestock and poultry products (including meat, dairy and eggs). The products are mostly sold at grocery stores or exported overseas. These are also used as feedstock for other industries. For example, cotton is used in the clothing industry and corn is used in the ethanol industry.
Factors Shaping the Future of Agriculture - Operations Industry
Elevated Costs: Industry participants have been witnessing higher costs due to rising raw material, freight and logistics costs, including constraints in labor and trucking resources, leading to higher lead times for deliveries. Supply-chain concerns and commodity cost pressure have been affecting the profitability of agricultural companies for a while. The companies have resorted to pricing strategies to counter rising raw material costs. The industry participants are looking to counter the global supply-chain challenges by forming partnerships and distribution strategies. Despite the pricing strategies, supply-chain challenges and cost inflation are expected to continue hurting margins in the near term. Companies in the industry continue to face raised SG&A expenses due to higher performance-related compensation, project-related costs, commissions and variable compensation. The companies are also witnessing elevated costs for investments in technology and innovation to stay ahead of the race. Continued deleverage in SG&A expenses may continue to have a bearing on the profitability of companies.
Agricultural Export Projections: Per the U.S. Department of Agriculture, agricultural export projections for fiscal 2023 (ending Sep 30) of $181 billion suggest a decline of $3.5 billion from the February forecast of a record $183.5 billion. The export forecasts have been affected by declines in commodity groups, including corn, wheat, grain and feed exports and livestock, poultry, and dairy. Corn exports are expected to decline due to lower unit values and volumes as Brazil is poised to harvest a record second crop of corn. Wheat exports are expected to be impacted by lower volumes and unit values, as well as increased competition. Overall grain and feed exports are projected at $40.5 billion, down $3.3 billion from February. Total livestock, poultry, and dairy exports will reflect declines in beef and poultry exports, more than offsetting the increases in pork exports.
Robust Demand Trends for Organic Products: The industry has been benefiting from an organic movement, prompted by consumers’ increasing demand for healthier food. Agriculturists are adopting organic production techniques, and curtailing the use of chemicals and pesticides. Innovations in food processing, improved grain-handling techniques, larger storage spaces and strong emerging market demand are conducive to the industry’s growth. Healthy eating habits are likely to accelerate the purchase and consumption of alternative proteins. Focus on nourishment and wellness is pushing microbiome solutions to the forefront. The companies have been investing in acquisitions and joint ventures to build top-notch ingredients and solutions for meeting the demand for healthy products.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Agriculture – Operations industry is a 14-stock group within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #216, which places it in the bottom 14% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries resulted from a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry vs. Broader Market
The Zacks Agriculture – Operations industry has underperformed the S&P 500 and the Zacks Consumer Staples sector in a year.
The stocks in the industry have collectively fallen 6.5% in a year against the growth of 19% for the Zacks S&P 500 composite and 6.7% for the sector.
One-Year Price Performance
Agriculture - Operations Industry's Valuation
On the basis of the forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing Consumer Staples stocks, the industry is currently trading at 12.28X compared with the S&P 500’s 19.39X and the sector’s 18.09X.
Over the last five years, the industry has traded as high as 17.37X, as low as 10.52X and at the median of 14.47X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
4 Agriculture Operations Stocks to Keep an Eye on
None of the stocks in the Zacks Agriculture – Operations universe currently carry a Zacks Rank #1 (Strong Buy) or #2 (Buy). Here, we suggest four stocks with a Zacks Rank #3 (Hold) from the same industry, which investors may hold on to. You can see the complete list of today’s Zacks #1 Rank stocks here.
Archer Daniels: This Chicago, IL-based agricultural product company’s leadership in key global trends like flexitarian diets, nutrition and sustainable materials has been a key contributor to its momentum. Its focus on making investments in assets and technological capabilities to serve customers efficiently is likely to be a significant growth driver. Solid demand, improved productivity and product innovations have been driving growth. Its Readiness program, positive cash flow and solid performance at the Nutrition unit have been aiding the results. The company has been progressing well on its three strategic pillars — optimize, drive and growth.
Management is optimistic about the company’s 2022 results and envisions another year of strong earnings growth. It is poised to benefit from the robust performance of its Nutrition segment, owing to significant gains in the Human and Animal Nutrition units. The Zacks Consensus Estimate for Archer Daniels’ 2023 earnings has moved up by a penny in the past 30 days to $6.84 per share. The Zacks Consensus Estimate for ADM’s 2023 sales and earnings suggests declines of 4% and 12.9%, respectively, from the year-ago period’s reported figures. It delivered an earnings surprise of 23.4%, on average, in the trailing four quarters. The company has declined 3.5% in the past year.
Price and Consensus: ADM
Corteva: This Wilmington, DE-based pure-play agriculture company is poised to drive above-market growth through its industry-leading product pipeline, and rigorous approach to innovation and operating discipline. It is poised to accelerate its pace of innovation and existing leadership position in the high-value sector to meet the increasing market demand for naturally derived products through three new collaboration agreements. Strong price execution in seed, supply-chain flexibility and solid market demand for its balanced and differentiated new product portfolios are driving CTVA’s performance.
The Zacks Consensus Estimate for Corteva’s 2023 earnings has been unchanged in the past 30 days. The Zacks Consensus Estimate for its 2023 sales and earnings suggests growth of 7.3% and 12%, respectively, from the year-ago period’s reported figures. The company delivered an earnings surprise of 62.7%, on average, in the trailing four quarters. The CTVA stock has increased 8.4% in the past year.
Price and Consensus: CTVA
Adecoagro: This Luxembourg-based agro-industrial company engages in farming crops and other agricultural products, dairy operations, sugar, ethanol and energy production, and land transformation activities in South America. The company benefits from high asset flexibility, which gives it a competitive advantage in the current uncertain market outlook. Its flexibility is reflected in its ability to increase the mix of anhydrous ethanol to benefit from its high prices and recovering demand. The company’s Farming & Land Transformation businesses have been benefiting from the consolidation of the five-year plan investments made in Crops, Rice and Dairy businesses, along with its focus on efficiencies.
The company’s shares have rallied 7.8% in the past year. The Zacks Consensus Estimate for AGRO’s 2023 earnings has moved up 20.3% in the past seven days to 83 cents per share. The Zacks Consensus Estimate for the company’s 2023 sales and EPS suggests declines of 13.1% and 26.6%, respectively, from the year-ago period’s reported figures.
Price and Consensus: AGRO
Limoneira: Santa Paula, CA-based Limoneira is a diversified citrus growing, packing, selling and marketing company with related agribusiness activities and real estate development operations. The company’s strategic approach toward fresh utilization has been resulting in robust sales of fresh lemons by its sales and marketing team. The company’s avocado segment’s sales are poised to benefit from robust pricing, which has almost doubled year over year. LMNR is on track with its new plan to expand One World of Citrus, increase its avocado plantings and strategically sell certain assets to dramatically increase cash flow in the near term.
The company’s shares have gained 20.3% in the past year. The Zacks Consensus Estimate for its fiscal 2023 sales suggests a decline of 5.6% from the year-ago period’s reported figure. The loss estimate for fiscal 2023 of 20 cents implies a significant increase from a loss of 8 cents reported in the prior year. LMNR delivered a negative earnings surprise of 42.3%, on average, in the trailing four quarters.
Price and Consensus: LMNR
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Archer Daniels Midland Company (ADM) : Free Stock Analysis Report
Adecoagro S.A. (AGRO) : Free Stock Analysis Report
Limoneira Co (LMNR) : Free Stock Analysis Report
Corteva, Inc. (CTVA) : Free Stock Analysis Report
