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Agriculture-Operations Industry Rides Wave of Organic Foods

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The Zacks Agriculture – Operations industry comprises companies that either produce or procure, transport, store, process and distribute agricultural commodities to consumers and ingredients to other parts of the agriculture industry (like the clothing, animal feed, energy and industrial products industries). Some of these players also engage in dairy operations, land transformation activities and development of food ingredients using gene-editing technology.

The industry encompasses production activities related to traditional farming of crops (such as corn, soybeans, wheat and cotton), and livestock and poultry products (including meat, dairy and eggs). These products are mostly sold at grocery stores or exported overseas. Additionally, these are used as feedstock for other industries — like cotton is used in the clothing industry and corn is used in the ethanol industry.

Here are the industry’s three major themes:

  • The industry is riding high on the benefits of the organic movement, wherein agriculturists are adapting to organic production techniques and reducing use of chemicals and pesticides. Further, innovations in food processing, improved grain handling techniques, larger storage spaces, diversification and strong emerging market demand are conducive to the industry. This shift to organic methods to satisfy consumers’ increasing demand for healthier food bodes well for agri-based products.
  • The agriculture industry is poised for growth through 2019 according to the USDA’s latest projections for agricultural exports. USDA estimates agricultural exports of $144.5 billion for 2019 (up from $144 billion projected for 2018), as exports for wheat and horticultural products are set to improve.
  • The rising rift related to trade between the United States and China may pose a barrier to the growth of the U.S. agricultural segment. Adversities arising from China’s retaliatory tariffs on American agricultural products, such as soybeans, corn, pork and poultry, are turning to be a major concern for the U.S. farming segment. Among these, soybean is likely to be impacted the most as China is the largest importer. The USDA projects agricultural exports to China to witness a decline of $7 billion from the fiscal 2018 level to $12 billion in 2019, due to marked declines in soybean exports.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Agriculture – Operations industry, which is housed within the broader Zacks Consumer Staples sector, currently carries a Zacks Industry Rank #78. This rank places it at the top 30% 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 solid 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.

Our proprietary Heat Map shows that the industry’s rank has been within a wide range over the past eight weeks. In the past four weeks, the industry’s rank deteriorated to 108 before improving to 78.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of 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. In the past year, the industry’s earnings estimates for the current year have been increased by nearly 30.9%.

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 Outperforms Shareholder Returns

The Zacks Agriculture – Operations industry has outperformed both the S&P 500 and its own sector over the past year.

While the stocks in this industry have collectively gained 2.9%, the Zacks S&P 500 composite has improved 0.1%. On the other hand, the Zacks Consumer Staples sector has declined 12.3% over this period.

One-Year Price Performance


Agriculture – Operations Industry’s Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing Consumer Staples stocks, the industry is currently trading at 11.34X compared with the S&P 500’s 15.8X and the sector’s 17.86X.

Over the last five years, the industry has traded as high as 16.01X, as low as 11.34X, and at the median of 13.91X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

The agricultural segment remains resilient given the increasing demand for food due to the drastic rise in global population and changing dietary preferences, particularly in the emerging markets. Further, a stable economic backdrop with a tightened job market and rising income present a favorable scenario for the growth of this consumer-driven industry.

Though the adversities of rising tariffs cannot be ignored, this industry seems poised to gain from the organic methods of cultivation and improved processing and handling of grains.

While none of the stocks in the Zacks Agriculture – Operations universe currently holds a Zacks Rank #1 (Strong Buy), here we present two stocks with a Zacks Rank #2 (Buy). Additionally, we suggest another two stocks with 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 Midland Company (ADM - Free Report) : The consensus EPS estimate for this Chicago, IL-based company, which is one of the world’s largest grain traders and a major food processor, has moved up nearly 2.9% for the current fiscal in the past 30 days. This Zacks Rank #2 stock has rallied 16.4% in the past year.

Price and Consensus: ADM

Calyxt Inc. (CLXT - Free Report) : The stock of this New Brighton, MN-based company has gained 3.6% in the past two years. The Zacks Consensus Estimate for current year witnessed positive estimate revisions of 8 cents in the last 30 days. The company currently has a Zacks Rank #2.

Price and Consensus: CLXT

Adecoagro S.A. (AGRO - Free Report) : This Luxembourg-based agricultural company carries a Zacks Rank #3 (Hold). The Zacks Consensus Estimate for the company’s current fiscal EPS has moved up by 14.6% in the last seven days.

Price and Consensus: AGRO

Limoneira Company (LMNR - Free Report) : The stock of this California-based company has gained 10.3% year to date. The consensus EPS estimate for the current year has been stable in the last 30 days. The company currently has a Zacks Rank #3.

Price and Consensus: LMNR

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