4 Agriculture - Products Stocks to Watch in a Challenging Industry
The Zacks Agriculture - Products industry has been bearing the brunt of high input costs, labor shortage and supply chain headwinds. The decline in commodity prices adds to the concerns. Nevertheless, increasing consumer awareness regarding food ingredients and the preference for healthier alternatives will support the industry. Alternative agricultural technologies like hydroponics and vertical farming are expected to be other key catalysts, given their inherent benefits.
Players like Bunge Limited BG, GrowGeneration GRWG, Hydrofarm HYFM and Arcadia Biosciences RKDA are poised well to gain from the strong demand in their end markets and ongoing growth initiatives.
Industry Description
The Zacks Agriculture – Products industry comprises companies that are involved in storing agricultural commodities or distributing ingredients to others or engaged in farming 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, wherein income is generated from 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 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
Volatile Prices, High Costs Remain Concerns: Corn prices have declined this year amid improving supply prospects. Per USDA, global corn production is expected to reach a record high in the upcoming marketing year, with solid growth in output in North and South America. Corn production in the United States is expected to touch a record high of 15.3 billion bushels. However, corn prices have picked up recently as inadequate growing weather in the United States impacted the incoming crop. According to USDA, 69% of US corn was in good-to-excellent conditions at the end of May — the lowest in four years due to dry weather in the U.S. Western Corn Belt. Soybean prices have also been impacted this year. Players in the industry have also been facing rising labor, packaging and distribution costs, among other expenses. Companies engaged in animal products have been facing rising production costs, as feed ingredient prices are stubbornly high. Supply-chain headwinds are also expected to be a concern in the near term. Companies are implementing cost-reduction actions and pricing strategies to sustain margins in the current scenario.
Solid Demand to Support Industry: Demand for food is directly influenced by population and demographic changes beside 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%. in response to growing consumer demand for healthier food alternatives, several 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 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 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, wherein 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 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.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Agriculture - Products industry is part of the broader Zacks Basic Materials sector. The industry currently carries a Zacks Industry Rank #234, which places it in the bottom 7% of the 251 Zacks industries.
The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates vleak 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.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the downward earnings per share outlook for the constituent companies in aggregate. Looking at the aggregate earnings per share estimate revisions, it appears that analysts are losing confidence of late in this group’s growth potential. This year, the industry’s earnings per share estimates for 2023 and 2024 have moved 26% and 30% south, respectively.
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 Underperforms Sector & S&P 500
The Zacks Agriculture – Products industry has underperformed its sector and the Zacks S&P 500 composite over the past 12 months. Stocks in this industry have fallen 8.2% in the past 12 months compared with the S&P 500’s growth of 14.6% and the Basic Materials sector’s rise of 0.3%.
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 4.11X compared with the S&P 500’s 13.17X. The Basic Materials sector’s trailing 12-month EV/EBITDA is 8.96X. 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 15.50X and as low as 3.10X, with the median being 7.04X.
4 Agriculture - Products Stocks to Keep an Eye on
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. The benefits from these actions are being reflected on its gross profits. The company launched GoodWheat Pasta nationwide last year, in retail and online. 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. RKDA has made it available in more stores through the past year. GoodWheat pasta along with Zola and ProVault is expected to be a key growth catalyst for the company. RKDA is working on its 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 90% 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 2023 earnings are currently pegged at a loss of $21.85 per share. The estimate has moved up from a prior projected loss of $24 per share to the current 21.85 cents in the past 60 days. RKDA has a trailing four-quarter earnings surprise of 40.6%, on average. It currently carries a Zacks Rank #2 (Buy).
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price: RKDA
Bunge: The company recently entered into an agreement to merge with Viterra Limited in a stock and cash transaction. The merger will create an innovative global agribusiness company that will be better poised to meet the increasing demand for the food, feed and fuel products offerings. With Bunge and Viterra’s highly complementary asset footprints, the combined entity will be able to connect the world’s largest production regions to areas with the fastest growing consumption. It will have increased diversification across assets, supply chains, geographies and crops. With a better balance of value chains across geographies, access to more markets and a diversified agriculture network covering all major crops, the company will be able to provide solutions for end-customers in any environment. The combination is expected to result in around $250 million of annual gross pre-tax operational synergies within three years of completion.
Bunge is an integrated global agribusiness and food company covering the farm-to-consumer food chain. This St. Louis, MO-based company has a trailing four-quarter earnings surprise of 6.6%, on average. It carries a Zacks Rank #3 (Hold) at present. The company’s shares have declined 7.8% in the past year.
Price: BG
GrowGeneration: The company continues to focus on building and growing its private brands, investing in accretive and complementary acquisitions, and expanding its store presence. Its acquisition strategy is focused on acquiring well-established, profitable hydroponic garden centers and proprietary brands and private label brands. The company currently has 63 stores across 18 states. GRWG has been right-sizing its cost structure, lowering inventory and consolidating its store footprint. It expects 2023 margins to benefit from these actions. The favorable mix impact from a greater proportion of private label and proprietary brand sales is also expected to favor results. The company recently announced a multi-year partnership with GrowLife, Inc. PHOT. The deal will position both companies as early adopters in the rapidly-increasing mushroom farming industry by focusing on the development and selling of mycology supplies.
Greenwood Village, CO-based GrowGeneration owns and operates retail hydroponic and organic gardening stores in the United States. The Zacks Consensus Estimate for the company’s fiscal 2023 earnings moved up from a loss of 38 cents per share to 31 cents in the past 60 days. GRWG currently carries a Zacks Rank #3. The company’s shares have declined 0.3% in the past year.
Price: GRWG
Hydrofarm: The company is focused on streamlining operations, reducing costs and improving efficiencies amid the challenging operating environment. Major initiatives include narrowing the product and brand portfolio and relocating and consolidating certain manufacturing and distribution centers, closure of two company locations. These efforts are expected to drive margins by improving brand sales mix and productivity and reducing costs. The company has also been expanding its reach to serve commercial cannabis and commercial food & floral end users.
Shoemakersville, PA-based Hydrofarm engages in the manufacture and distribution of controlled environment agriculture (CEA) equipment and supplies in the United States and Canada. It provides agricultural lighting devices, indoor climate control equipment, and nutrients, as well as plant additives used to grow, farm and cultivate cannabis, flowers, fruits, plants, vegetables, grains and herbs in controlled environment. The Zacks Consensus Estimate for HYFM’s earnings for fiscal 2023 is pegged at a loss of 94 cents. The estimate has moved up from a loss of 97 cents expected 60 days ago. The company has a trailing four-quarter earnings surprise of 21.1%, on average. HYFM currently carries a Zacks Rank #3. The company’s shares have declined 7.5% in the past year.
Price: HYFM
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Bunge Limited (BG) : Free Stock Analysis Report
Arcadia Biosciences, Inc. (RKDA) : Free Stock Analysis Report
Growlife Inc. (PHOT): Free Stock Analysis Report
GrowGeneration Corp. (GRWG) : Free Stock Analysis Report
Hydrofarm Holdings Group, Inc. (HYFM) : Free Stock Analysis Report
