5 Stocks to Play High Agriculture Prices

NEW YORK ( Karvy Global) -- Potash Corp. of Saskatchewan ( POT), Deere ( DE), Agrium ( AGU), Yongye International ( YONG), and Zhongpin ( HOGS) will likely provide attractive returns to investors because of increases in agricultural commodities prices that have been driven by production shortfalls and growing food demand.

These stocks have returned 8% to 12% over the past month. However, we expect further gains in the short to medium term.

A combination of burgeoning food demand and massive population growth could drive the agriculture sector. Despite improved production levels, food scarcity is increasing alarmingly. The United States Department of Agriculture expects a 12% tightening in global grain stocks during the next crop year. Higher consumption in emerging economies like India and China, compounded by changing weather patterns, could exacerbate food shortages.

Escalating food demand is driving the fertilizer industry. Potash, phosphate and other nitrogen-based fertilizers are poised to see greater demand, as farmers seek to ensure higher yields and improved production.

The stocks selected are trading at forward price-to-earnings ratios of 6 to 12 (using estimated 2011 earnings), a discount to their historical average of 10 to 15. We have identified stocks with a more than $400 million market capitalization and an average 50% buy rating. The stocks are ranked by the percentage of total analyst ratings that are buy ratings.

No. 5: Potash Corporation of Saskatchewan

This is a Canada-based integrated fertilizer and feed company.

The company reported a 60% year-over-year jump in earnings to $402 million. Higher profitability is an indication of strong demand for potash and nitrogen products. Revenue from operations surged 43% during the quarter.

"Rapidly rising prices for a number of key crop commodities pushed our industry past the inflection point, as demonstrated by stronger demand and the beginning of pricing momentum for all nutrients, including potash later in the quarter," said Bill Doyle, president and CEO of Potash, in a press release,

Gross margins jumped from 31.4% in September 2009 to 35.8% in the last quarter. The potash segment delivered nearly two-thirds of quarterly gross margin. The first phase of the expansion of the company's Cory SK facility was also completed. The stock has been among the best performers in the sector, churning out gains of 35% during the last year. The stock is trading with a forward P/E of 5 to 6.

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No. 4. Agrium

This is a wholesale and retail player in agriculture commodities. The company caters to the U.S as well as South American markets such as Chile, Argentina and Uruguay.

Net income more than doubled to $57 million during the third quarter of 2010, compared with last year. Net sales rose 9% during the same period.

"While EBITDA from our retail operations this quarter was almost double last year's level and wholesale's rose by more than 60%, we expect the improvements in the crop input markets to become even more evident in the fourth quarter of 2010," said Mike Wilson, Agrium's president and CEO, in a press release. "Furthermore, we anticipate the strength in crop input demand and prices to continue into the spring of 2011, benefiting all three of our strategic business units."

The company's fourth-quarter guidance for earnings per share was $1.00 to $1.30. The company recently acquired Australian-based grain marketer and seller AWB. The stock is trading with a forward P/E of 12 to 13.

No. 3: Deere

Deere is a U.S.-based company with business interests in segments like agriculture and turf, construction, forestry and credit.

During the fourth quarter, net income increased to $457 million, compared with a net loss of $223 million during the same period last year. Net sales zoomed 35% to $7.2 billion. The equipment operations segment posted a net sales increase of 39% during the quarter.

Management sounded positive on the strong prospects for U.S. farm production, compared with European production.

"Although conditions continued to be positive in the U.S. farm sector, and included a highly favorable sales mix of larger equipment, European agricultural markets remained soft," said Deere's chairman and CEO, Samuel R. Allen, in a press release,

Allen announced a new combine harvester factory and a joint-venture production facility for construction equipment, both in India. The company intends to sell its wind energy business. The stock delivered returns of 41% during the last year and is trading with a forward P/E of 6 to 7.

Zhongpin

Zhongpin is a China-based meat- and food-processing company.

Net sales increased 24% in the September quarter to $240 million, while net income rose 11% to $14.7 million.

A precooling facility and expansion of the Anyang plant was completed during the September quarter. The plant's capacity for processed meat increased 35% to 85,000 metric tonnes (MT). An investment worth $61 million will be made in a similar facility in the Jilin Province with a production capacity of 70,000 MT, with completion scheduled by the end of 2012.

After the third-quarter results, the management maintained its earlier guidance for 2010. Warren Wang, Zhongpin's chief financial officer, said, "For 2010, we continue to believe that Zhongpin's sales revenue should be within a range of $900 million to $940 million, with gross profit within the range of $106 million to $115 million and net income within the range of $52 million to $57 million." The stock is trading with a forward P/E of 7 to 8.

No. 1: Yongye International

Yongye International is a China-based plant and animal nutrients company with a market capitalization of $400 million. Addressing the needs of the agriculture sector, YongYe's products improve crop yields and livestock health.

During the 2010 third quarter, revenue grew 145% to $72 million, driven by an increased number of store distributors and expansion into new markets. Hebei Province is the single largest market for the company, contributing around 30% of total sales.

Gross profit jumped 166% to $42 million during the same period. Gross margin expanded 500 basis points to 9%, attributable to the high-margin Hebei sales. Net income improved to $18 million, compared with a loss of $7 million during the same period last year. The stock delivered a 15% return last month and is trading with a forward P/E of 10 to 11.

>To see these stocks in action, visit the 5 Stocks to Play High Ag Prices portfolio on Stockpickr.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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