Three Top-Rated Agricultural Plays
Editor's note: As part of our partnership with PBS's Nightly Business Report, TheStreet's Scott Eden joined NBR to discuss the farm economy and ways to invest in agriculture. (Watch video and read transcript)
NEW YORK (
) -- Any company that sells into the farm economy has seen its stock explode in value since the corn reached knee-high back on the Fourth of July .
Indeed, maize is largely the reason. The USDA, which had initially called for a bumper harvest in 2010, was forced to reel in those estimates all year as intense heat spread across the North American corn belt, reducing crop yields. Ditto those other staples, soybeans and cotton. Meanwhile, in the grain business, epochal droughts in Russia ruined the wheat crop there, causing a global tightening of supply.
As agricultural commodities spiked worldwide, so too did the share prices of a range of companies that do business with agrarians, from fertilizer producers like
Agrium
(AGU)
, to equipment manufacturers like
Deere
(DE) - Get Report
, to diversified chemicals concerns like
DuPont
(DD) - Get Report
, whose bioengineered seed business has taken market share this year from a struggling
Monsanto
(MON)
.
The run-up in stocks since midsummer might cause some investors to worry that these equities are overbought. Not so fast, says Chris Damas, an ag-stock investor and analyst with BCMI Research in Ontario.
On Nov. 9, with more than 90% of American corn out of the ground, the USDA will release its latest harvest report. Experts expect yet another round of scaled-back yield estimates for the 2010 U.S. corn crop. If those prognostications turn out to be right, prices on the futures markets will jump again, and so will ag shares.
Likewise, because U.S. farmers are flush with cash, analysts expect them to stock up on fertilizers, seeds and weedkillers, and perhaps to take the opportunity to upgrade those old Deere harvesters.
Planters are also highly motivated this year to get their fall applications down in quantity. For one thing, given the increasing volatility of the weather, growers worry that inclement conditions could prevent them from getting their crops planted in the spring. Do it now and no worries.
Furthermore, since fertilizer prices have done nothing but rise since the summer, farmers might want to buy now rather than risk that prices will be even higher next spring.
Forthwith, here's a look at three companies that play in the agriculture space, and whose shares received top ratings from
TheStreet's
stock-rating service.
Deere
Company Profile
Maker of the iconic green-and-yellow farm machines, Moline, Ill.-based Deere symbolizes the American bread basket. But the company is more than threshers and tractors. Like rival Caterpillar, Deere makes trucks for the construction industry, a business that remains in the recessionary tank. Until the U.S. starts building stuff again, Deere will look toward farmers for growth, especially overseas and especially in Brazil, which has suddenly developed perhaps the world's second-most efficient agricultural industry.
Deere's stock earns top honors in
TheStreet's
"total returns" category, beating 90% of our coverage universe.
Income Statement
Deere, which will report fourth-quarter earnings on Nov. 24, earned 23 cents a share in the year-ago period. Analysts are looking for 92 cents this time around. The company has a steady dividend yield, better than 70% of the companies covered by
TheStreet's
ratings service.
Stock Ratios
Deere has a forward price-to-earnings multiple of 15.21. It's trailing 12-month PE ratio, which stands at 27.7, compares with an industry average of 28.5. The agriculture bull run has made Deere shares pricier than the broader equities market; the average PE for stocks on the S&P 500 is 18.
Analyst Ratings
Out of the 22 analysts covering Deere, 64% have the equivalent of "strong buy" ratings on the stock. Deere bears do indeed exist as a species, however: About 32% -- or seven analysts -- have hold ratings on the stock.
Agrium
Company Profile
Agrium, based in Canada, is the most diversified of major fertilizer producers, playing in the potash, nitrogen and phosphate spaces. But the core reason the company remains a favorite among stock pickers: its huge retail chain of farm-products depots flung throughout North America's growing regions, which add some retail spice to the company's profit margins. "Generally the company will make money no matter what," says Damas.
Agrium, like Deere, earns five out of five stars in the total returns category, defeating 90% of
The Street's
coverage universe.
Income Statement
Agrium is set to report its third quarter on Wednesday. The whisper numbers, not surprisingly at all, are calling for a beat. As it stands, the Wall Street consensus sits at 89 cents a share. A year ago, the company earned 19 cents a share.
Stock Ratios
Agrium has a forward price-to-earnings multiple of 14.1. Its trailing 12-month PE ratio stands at about 25, compared with an industry average of 19.8. Like Deere, Agrium shares are pricier than the broader equities market; the average PE for stocks on the S&P 500 is 18.
Analyst Ratings
Out of the 22 analysts covering Agrium, more than 95% have the equivalent of strong buy or moderate buy ratings on the stock. Just one analyst has a hold rating on the stock.
DuPont
Company Profile
DuPont reported its third-quarter results last week, surpassing Wall Street views and lifting its 2010 full-year outlook, but profit decreased 10%, making it one of the few industrial companies to post a year-over-year drop-off this earnings season, which caused some concern among investors. DuPont blamed the decline on its pharmaceuticals segment, where two drugs came off patent protection.
But the company performed well elsewhere. Much of the talk about DuPont has focused on its genetically modified seed business, which has scooped up market share as its archenemy in the field, Monsanto, continues to struggle. Somehow, too, DuPont has escaped the tough criticism over bioengineered crops that has afflicted its more ag-focused rival.
DuPont's total return rating -- 4.5 out of 5 stars -- trails Agrium and Deere, but shares of the diversified chemicals giant have still performed better than 80% of the stocks covered by
TheStreet's
ratings service.
Income Statement
Looking ahead, DuPont hiked its 2010 guidance, saying it now expects per-share earnings of about $3.10, better than the Wall Street consensus of $3.04. In all of 2009, DuPont earned $2.03 a share.
Stock Ratios
Agrium has a forward price-to-earnings multiple of 14.1. Its trailing 12-month PE ratio stands at about 25, compared with an industry average of 19.8. Like Deere, Agrium shares are pricier than the broader equities market; the average PE for stocks on the S&P 500 is 18.
Analyst Ratings
Out of the 16 analysts covering DuPont, about 56% have the equivalent of strong buy or moderate buy ratings on the stock. Sentiment for the Delaware company isn't as bullish as that for Agrium or Deere, with seven analysts rating DuPont stock at hold.
-- Written by Scott Eden in New York
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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.
