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5 Stocks to Watch in a Prospering Agriculture Operations Industry
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The Zacks Agriculture – Operations industry is poised to benefit from improved consumer demand for healthy products. Investments in acquisitions, joint ventures and expansion are likely to fortify the prospects of the industry players. Logistic and supply-chain issues, higher input costs, and elevated operational expenses continue to mar the industry. Supply-chain concerns and commodity cost pressures have been affecting the profitability of agricultural companies for a while.
Nonetheless, continued investments in assets and technological capabilities to innovate and serve customers bode well for players like Archer Daniels Midland Company (ADM - Free Report) , Corteva Inc. (CTVA - Free Report) , Adecoagro S.A. (AGRO - Free Report) , Calavo Grower (CVGW - Free Report) , and Alico Inc. (ALCO - Free Report) .
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 (like the clothing, animal feed, energy and industrial product industries). 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, soybeans, 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 ex, cotton is used in the clothing industry and corn is used in the ethanol industry.
What's Shaping the Future of Agriculture - Operations Industry
Growing Organic Demand: The industry is benefiting from an organic movement, prompted by consumers’ increasing demand for healthier food. Agriculturists are adapting to 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. Moreover, 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.
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 pressures have been affecting the profitability of agricultural companies for a while. The companies have resorted to solid pricing strategies to counter the rising raw material costs. The participants are looking to counter the global supply-chain challenges by entering partnerships and distribution strategies. Players with flexible supply chains are poised to overcome the pandemic-led disruptions. Though the pricing strategies come into play, the challenges in supply chains and cost inflation are expected to continue hurting margins in the near term.
Companies in the industry continue to face higher SG&A expenses due to higher performance-related compensation, project-related costs, commissions, and variable compensation. The companies are also witnessing higher costs for investments in technology and innovation to stay ahead of the race. Continued deleverage in SG&A expenses might continue to have a bearing on the profitability of companies.
Agricultural Export Projections Lowered: Per the USDA, agricultural export projections for fiscal 2021 (ending Sep 30) are $175.5 billion, reflecting a decline of $2 billion from expectations released in August. The key factors resulting in lower export projections are reductions in oilseed and oilseed product exports, partially offset by increases in livestock, poultry, dairy, cotton, and ethanol exports. The projection for soybean and soybean meal exports is reduced due to lower prices and softening China demand. Additionally, increases in the export forecast for livestock, poultry and dairy products are likely to be driven by gains across all major commodities, except for pork. Grain and feed exports are revised down by $300 million to $41.5 billion, with corn, sorghum and rice exports each down $100 million.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Agriculture – Operations industry is a 12-stock group within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #100, which places it at the top 40% 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 bright 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 top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining 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 gained 2.4% compared with growth of 16.7% for the Zacks S&P 500 composite and 5.5% for the sector in a year.
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 14.47X compared with the S&P 500’s 20.57X and the sector’s 20.27X.
Over the last five years, the industry has traded as high as 17.17X, as low as 10.12X and at the median of 14.18X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
5 Agriculture Operations Stocks to Watch
One stock in the Zacks Agriculture – Operations universe currently sports a Zacks Rank #1 (Strong Buy), while we have no stock with a Zacks Rank #2 (Buy). We suggest four more 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.
Let’s have a look at them.
Archer Daniels: The Chicago, IL-based agricultural product company’s leadership in key global trends like flexitarian diets, nutrition and sustainable materials has been a contributor to its momentum. Its focus on making investments in assets and technological capabilities to serve customers efficiently is likely to be a key growth driver. Its Readiness program, positive cash flow and solid performance at the Nutrition unit have been aiding results. The company has been progressing well on its three strategic pillars — optimize, drive and growth.
Management is optimistic about 2022 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’ 2022 earnings has moved up 9.8% in the past 30 days to $5.14 per share. The Zacks Consensus Estimate for ADM’s 2022 sales suggests growth of 3.4%, while the same for earnings reflects a decline of 0.9% from the year-ago period’s reported figures. It has reported an earnings surprise of 21.9%, on average, in the trailing four quarters. The company currently sports a Zacks Rank #1 and has rallied 37.2% in the past year.
Price and Consensus: ADM
Corteva: The 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 2022 earnings has moved down 3.8% in the past seven days. The Zacks Consensus Estimate for its 2022 sales and earnings suggests growth of 7.8% and 16.3%, respectively, from the year-ago period’s reported figures. The company has reported an earnings surprise of 21.9%, on average, in the trailing four quarters. It currently has a Zacks Rank #3. The stock has gained 14.8% in the past year.
Price and Consensus: CTVA
Adecoagro: The 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 the high flexibility of its assets, which is a competitive advantage in the current uncertain market outlook. Its flexibility was reflected by 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 currently carries a Zacks Rank #3 and its stock has dipped 0.5% in the past year. The Zacks Consensus Estimate for AGRO’s 2022 earnings has moved up by a penny in the past seven days. The Zacks Consensus Estimate for its 2022 sales suggests growth of 11.2%, while the same for earnings indicates a decline of 9.6% from the year-ago period’s reported figures.
Price and Consensus: AGRO
Calavo Grower: The Santa Paula, CA-based company markets and distributes avocados, prepared avocados, and other perishable foods to retail grocery and foodservice customers, club stores, mass merchandisers, food distributors, and wholesale customers worldwide. The company has been benefiting from the robust demand for fresh, healthy and convenient products. It is positioned to benefit from progress on its Project Uno, focused on improving profits through pricing initiatives, SKU rationalization, plant optimization and unified procurement, freight, and back-office activities across all business units. CVGW is gaining from price increases across its product lines amid the inflationary cost environment. However, industry-wide inflationary pressures on raw materials, freight and labor costs remain uncertain.
The Zacks Consensus Estimate for the company’s current fiscal-year EPS has been unchanged in the past 30 days. The Zacks Consensus Estimate for CVGW’s current fiscal-year sales and earnings suggests growth of 10.3% and 280%, respectively, from the year-ago period’s reported figures. It has reported an earnings surprise of 4.1%, on average, in the trailing four quarters. CVGW currently carries a Zacks Rank #3 and has declined 45.4% in the past year.
Price and Consensus: CVGW
Alico: The Fort Myers, FL-based agribusiness and land management company is poised to benefit from the strong consumption of not-from-concentrate orange juice by retail consumers, which has been sturdy since March 2020. This has significantly aided market pricing for both Early and Mid-Season, and Valencia season fruit. Driven by the strong consumption of not-from-concentrate orange juice and lower-than-normal levels of processor inventories, the company expects market prices in next year to remain near or above recent levels.
The Zacks Consensus Estimate for the current fiscal-year earnings has been unchanged in the past 30 days. The Zacks Consensus Estimate for ALCO’s current fiscal-year sales suggests a decline of 7.7%, while that for earnings suggests growth of 40.3% from the year-ago period’s reported figures. It has reported an earnings surprise of 16.9%, on average, in the trailing four quarters. ALCO currently has a Zacks Rank #3. The company has gained 8.2% in the past year.
Price and Consensus: ALCO
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5 Stocks to Watch in a Prospering Agriculture Operations Industry
The Zacks Agriculture – Operations industry is poised to benefit from improved consumer demand for healthy products. Investments in acquisitions, joint ventures and expansion are likely to fortify the prospects of the industry players. Logistic and supply-chain issues, higher input costs, and elevated operational expenses continue to mar the industry. Supply-chain concerns and commodity cost pressures have been affecting the profitability of agricultural companies for a while.
Nonetheless, continued investments in assets and technological capabilities to innovate and serve customers bode well for players like Archer Daniels Midland Company (ADM - Free Report) , Corteva Inc. (CTVA - Free Report) , Adecoagro S.A. (AGRO - Free Report) , Calavo Grower (CVGW - Free Report) , and Alico Inc. (ALCO - Free Report) .
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 (like the clothing, animal feed, energy and industrial product industries). 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, soybeans, 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 ex, cotton is used in the clothing industry and corn is used in the ethanol industry.
What's Shaping the Future of Agriculture - Operations Industry
Growing Organic Demand: The industry is benefiting from an organic movement, prompted by consumers’ increasing demand for healthier food. Agriculturists are adapting to 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. Moreover, 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.
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 pressures have been affecting the profitability of agricultural companies for a while. The companies have resorted to solid pricing strategies to counter the rising raw material costs. The participants are looking to counter the global supply-chain challenges by entering partnerships and distribution strategies. Players with flexible supply chains are poised to overcome the pandemic-led disruptions. Though the pricing strategies come into play, the challenges in supply chains and cost inflation are expected to continue hurting margins in the near term.
Companies in the industry continue to face higher SG&A expenses due to higher performance-related compensation, project-related costs, commissions, and variable compensation. The companies are also witnessing higher costs for investments in technology and innovation to stay ahead of the race. Continued deleverage in SG&A expenses might continue to have a bearing on the profitability of companies.
Agricultural Export Projections Lowered: Per the USDA, agricultural export projections for fiscal 2021 (ending Sep 30) are $175.5 billion, reflecting a decline of $2 billion from expectations released in August. The key factors resulting in lower export projections are reductions in oilseed and oilseed product exports, partially offset by increases in livestock, poultry, dairy, cotton, and ethanol exports. The projection for soybean and soybean meal exports is reduced due to lower prices and softening China demand. Additionally, increases in the export forecast for livestock, poultry and dairy products are likely to be driven by gains across all major commodities, except for pork. Grain and feed exports are revised down by $300 million to $41.5 billion, with corn, sorghum and rice exports each down $100 million.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Agriculture – Operations industry is a 12-stock group within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #100, which places it at the top 40% 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 bright 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 top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining 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 gained 2.4% compared with growth of 16.7% for the Zacks S&P 500 composite and 5.5% for the sector in a year.
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 14.47X compared with the S&P 500’s 20.57X and the sector’s 20.27X.
Over the last five years, the industry has traded as high as 17.17X, as low as 10.12X and at the median of 14.18X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
5 Agriculture Operations Stocks to Watch
One stock in the Zacks Agriculture – Operations universe currently sports a Zacks Rank #1 (Strong Buy), while we have no stock with a Zacks Rank #2 (Buy). We suggest four more 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.
Let’s have a look at them.
Archer Daniels: The Chicago, IL-based agricultural product company’s leadership in key global trends like flexitarian diets, nutrition and sustainable materials has been a contributor to its momentum. Its focus on making investments in assets and technological capabilities to serve customers efficiently is likely to be a key growth driver. Its Readiness program, positive cash flow and solid performance at the Nutrition unit have been aiding results. The company has been progressing well on its three strategic pillars — optimize, drive and growth.
Management is optimistic about 2022 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’ 2022 earnings has moved up 9.8% in the past 30 days to $5.14 per share. The Zacks Consensus Estimate for ADM’s 2022 sales suggests growth of 3.4%, while the same for earnings reflects a decline of 0.9% from the year-ago period’s reported figures. It has reported an earnings surprise of 21.9%, on average, in the trailing four quarters. The company currently sports a Zacks Rank #1 and has rallied 37.2% in the past year.
Price and Consensus: ADM
Corteva: The 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 2022 earnings has moved down 3.8% in the past seven days. The Zacks Consensus Estimate for its 2022 sales and earnings suggests growth of 7.8% and 16.3%, respectively, from the year-ago period’s reported figures. The company has reported an earnings surprise of 21.9%, on average, in the trailing four quarters. It currently has a Zacks Rank #3. The stock has gained 14.8% in the past year.
Price and Consensus: CTVA
Adecoagro: The 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 the high flexibility of its assets, which is a competitive advantage in the current uncertain market outlook. Its flexibility was reflected by 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 currently carries a Zacks Rank #3 and its stock has dipped 0.5% in the past year. The Zacks Consensus Estimate for AGRO’s 2022 earnings has moved up by a penny in the past seven days. The Zacks Consensus Estimate for its 2022 sales suggests growth of 11.2%, while the same for earnings indicates a decline of 9.6% from the year-ago period’s reported figures.
Price and Consensus: AGRO
Calavo Grower: The Santa Paula, CA-based company markets and distributes avocados, prepared avocados, and other perishable foods to retail grocery and foodservice customers, club stores, mass merchandisers, food distributors, and wholesale customers worldwide. The company has been benefiting from the robust demand for fresh, healthy and convenient products. It is positioned to benefit from progress on its Project Uno, focused on improving profits through pricing initiatives, SKU rationalization, plant optimization and unified procurement, freight, and back-office activities across all business units. CVGW is gaining from price increases across its product lines amid the inflationary cost environment. However, industry-wide inflationary pressures on raw materials, freight and labor costs remain uncertain.
The Zacks Consensus Estimate for the company’s current fiscal-year EPS has been unchanged in the past 30 days. The Zacks Consensus Estimate for CVGW’s current fiscal-year sales and earnings suggests growth of 10.3% and 280%, respectively, from the year-ago period’s reported figures. It has reported an earnings surprise of 4.1%, on average, in the trailing four quarters. CVGW currently carries a Zacks Rank #3 and has declined 45.4% in the past year.
Price and Consensus: CVGW
Alico: The Fort Myers, FL-based agribusiness and land management company is poised to benefit from the strong consumption of not-from-concentrate orange juice by retail consumers, which has been sturdy since March 2020. This has significantly aided market pricing for both Early and Mid-Season, and Valencia season fruit. Driven by the strong consumption of not-from-concentrate orange juice and lower-than-normal levels of processor inventories, the company expects market prices in next year to remain near or above recent levels.
The Zacks Consensus Estimate for the current fiscal-year earnings has been unchanged in the past 30 days. The Zacks Consensus Estimate for ALCO’s current fiscal-year sales suggests a decline of 7.7%, while that for earnings suggests growth of 40.3% from the year-ago period’s reported figures. It has reported an earnings surprise of 16.9%, on average, in the trailing four quarters. ALCO currently has a Zacks Rank #3. The company has gained 8.2% in the past year.
Price and Consensus: ALCO