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4 Agriculture Operations Stocks to Watch Amid Inflation Jitters
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The Zacks Agriculture – Operations industry faces a myriad of challenges that can impact productivity, sustainability and the overall well-being of the industry participants. Fluctuating commodity prices, rising input costs, trade uncertainties and elevated operational expenses have been affecting players for a while. As prices increase across the board, companies within this vital sector are grappling with challenges that impact their operations, profitability and long-term sustainability.
However, the industry is poised to benefit from innovations and improved consumer demand for healthy products. Investments in acquisitions, joint ventures and expansions are likely to fortify the prospects of the industry players. 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) and Dole plc (DOLE - 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 (including clothing, animal feed, energy and industrial products). 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, soybean, wheat and cotton), and livestock and poultry products (including meat, dairy and eggs). The products are mainly sold at grocery stores or exported overseas. These are also used as feedstock for other industries. For example, cotton is used in the clothing industry and corn is used in the ethanol industry.
Factors Shaping the Future of Agriculture - Operations Industry
Agricultural Export Projections: Per the U.S. Department of Agriculture, agricultural export projections for fiscal 2023 (ending Sep 30, 2023) of $177.5 billion mark a decline of $3.5 billion from the May forecast of a record $181 billion. The export forecasts have been affected by declines in commodity groups, including corn, wheat and tree nut exports. Moreover, the agricultural export projections for fiscal 2024 are estimated at $172 billion, reflecting a further decline from the revised estimate for fiscal 2023. Lower exports of soybeans, soybean meal and dairy products are expected to hurt agricultural exports in fiscal 2024.
Elevated Costs: Industry participants have been witnessing higher costs due to fluctuating commodity prices, rising input costs and trade uncertainties. Supply-chain concerns and commodity cost pressures have been affecting the profitability of agricultural companies for a while. One of the most immediate and tangible impacts of inflation on the agricultural operations industry is the surge in input costs. As inflation has escalated the prices of essential resources, the cost of production for agricultural companies has soared, squeezing profit margins. The companies have resorted to pricing strategies to counter rising raw material costs. The industry participants seek to counter the global supply-chain challenges by forming partnerships and distribution strategies. Despite the pricing strategies, commodity cost inflation is expected to continue hurting margins and profitability in the near term.
Companies in the industry continue to face raised SG&A expenses due to higher performance-related compensation, project-related costs, commissions and variable compensation. The companies are also witnessing elevated costs for investments in technology and innovation to stay ahead of the race. Continued deleverage in SG&A expenses may continue to have a bearing on the profitability of companies.
Robust Demand Trends for Organic Products: The industry has benefited from an organic movement prompted by consumers’ increasing demand for healthier food. Agriculturists are adopting 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 purchasing and consuming alternative proteins. 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.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Agriculture – Operations industry is a 15-stock group within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #148, which places it in the bottom 41% 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 dull near-term prospects. 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 resulted from a negative aggregate earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, analysts are gradually losing 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 look at the industry’s recent stock-market performance and valuation picture.
Industry vs. Broader Market
In a year, the Zacks Agriculture – Operations industry has underperformed the S&P 500 and the Zacks Consumer Staples sector.
The stocks in the industry have collectively fallen 34.7% in a year against growth of 15.8% for the Zacks S&P 500 composite. Meanwhile, the sector has declined 8.8%.
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 agriculture – Operations industry is currently trading at 11.19X compared with the S&P 500’s 19.26X and the sector’s 16.92X.
Over the last five years, the industry has traded as high as 17.51X, as low as 10.5X and at the median of 14.52X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
4 Agriculture Operations Stocks to Keep an Eye on
One stock in the Zacks Agriculture – Operations universe currently sports a Zacks Rank #1 (Strong Buy), and one other stock has a Zacks Rank #2 (Buy). Here, we suggest two other 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.
Dole: This Dublin, Ireland-based global leader in fresh produce is poised to benefit from improved logistical efficiencies in several areas, which brought increased stability to its core fruit business. The company’s diverse sourcing network and advanced farming practices are likely to help overcome the potential weather challenges in various regions. The company benefited from a healthier supply and demand balance in the first half of 2023, which allowed for a better pricing environment in Europe and much-improved selling conditions in the non-core markets.
The Zacks Consensus Estimate for Dole’s 2023 earnings has grown 4.8% in the past 30 days. The Zacks Consensus Estimate for its 2023 sales suggests a decline of 11.8% from the year-ago period’s reported figure. The consensus mark for earnings indicates 12.4% year-over-year growth. The company delivered an earnings surprise of 78.3%, on average, in the trailing four quarters. The DOLE stock has gained 13.3% in the past year. The company currently flaunts a Zacks Rank #1.
Price and Consensus: DOLE
Adecoagro: This 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 high asset flexibility, which gives it a competitive advantage in the current uncertain market outlook. Its flexibility is reflected in 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 consolidating the five-year plan investments made in Crops, Rice and Dairy businesses, along with its focus on efficiencies.
The Zacks Rank #2 company’s shares have rallied 40.2% in the past year. The Zacks Consensus Estimate for AGRO’s 2023 earnings has risen 9.6% in the past 30 days to $1.14 per share. The Zacks Consensus Estimate for the company’s 2023 EPS suggests growth of 0.9% from the year-ago period’s reported figure. The consensus mark for sales indicates a 6.7% year-over-year decline.
Price and Consensus: AGRO
Archer Daniels: This Chicago, IL-based agricultural product company’s leadership in critical global trends, such as flexitarian diets, nutrition and sustainable materials, has contributed to its momentum. Its focus on investing in assets and technological capabilities to serve customers efficiently is likely to be a significant growth driver. Solid demand, improved productivity and product innovations have been driving growth. Its Readiness program, positive cash flow and solid performance at the Nutrition unit have been aiding the results. The Zacks Rank #3 company has been progressing well on its three strategic pillars — optimize, drive and growth.
Archer Daniels 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’ 2023 earnings has increased 0.4% in the past 30 days to $7.26 per share. The Zacks Consensus Estimate for ADM’s 2023 sales and earnings suggests declines of 6.4% and 7.5%, respectively, from the year-ago period’s reported figures. It delivered an earnings surprise of 16.9%, on average, in the trailing four quarters. The company has lost 24.1% in the past year.
Price and Consensus: ADM
Corteva: This 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 2023 earnings has moved down 5.8% in the past 30 days. The Zacks Consensus Estimate for its 2023 sales and earnings suggests declines of 1.4% and 2.3%, respectively, from the year-ago period’s reported figures. The Zacks Rank #3 company has delivered an earnings surprise of 51.1%, on average, in the trailing four quarters. The CTVA stock has declined 30.3% in the past year.
Price and Consensus: CTVA
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4 Agriculture Operations Stocks to Watch Amid Inflation Jitters
The Zacks Agriculture – Operations industry faces a myriad of challenges that can impact productivity, sustainability and the overall well-being of the industry participants. Fluctuating commodity prices, rising input costs, trade uncertainties and elevated operational expenses have been affecting players for a while. As prices increase across the board, companies within this vital sector are grappling with challenges that impact their operations, profitability and long-term sustainability.
However, the industry is poised to benefit from innovations and improved consumer demand for healthy products. Investments in acquisitions, joint ventures and expansions are likely to fortify the prospects of the industry players. 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) and Dole plc (DOLE - 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 (including clothing, animal feed, energy and industrial products). 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, soybean, wheat and cotton), and livestock and poultry products (including meat, dairy and eggs). The products are mainly sold at grocery stores or exported overseas. These are also used as feedstock for other industries. For example, cotton is used in the clothing industry and corn is used in the ethanol industry.
Factors Shaping the Future of Agriculture - Operations Industry
Agricultural Export Projections: Per the U.S. Department of Agriculture, agricultural export projections for fiscal 2023 (ending Sep 30, 2023) of $177.5 billion mark a decline of $3.5 billion from the May forecast of a record $181 billion. The export forecasts have been affected by declines in commodity groups, including corn, wheat and tree nut exports. Moreover, the agricultural export projections for fiscal 2024 are estimated at $172 billion, reflecting a further decline from the revised estimate for fiscal 2023. Lower exports of soybeans, soybean meal and dairy products are expected to hurt agricultural exports in fiscal 2024.
Elevated Costs: Industry participants have been witnessing higher costs due to fluctuating commodity prices, rising input costs and trade uncertainties. Supply-chain concerns and commodity cost pressures have been affecting the profitability of agricultural companies for a while. One of the most immediate and tangible impacts of inflation on the agricultural operations industry is the surge in input costs. As inflation has escalated the prices of essential resources, the cost of production for agricultural companies has soared, squeezing profit margins. The companies have resorted to pricing strategies to counter rising raw material costs. The industry participants seek to counter the global supply-chain challenges by forming partnerships and distribution strategies. Despite the pricing strategies, commodity cost inflation is expected to continue hurting margins and profitability in the near term.
Companies in the industry continue to face raised SG&A expenses due to higher performance-related compensation, project-related costs, commissions and variable compensation. The companies are also witnessing elevated costs for investments in technology and innovation to stay ahead of the race. Continued deleverage in SG&A expenses may continue to have a bearing on the profitability of companies.
Robust Demand Trends for Organic Products: The industry has benefited from an organic movement prompted by consumers’ increasing demand for healthier food. Agriculturists are adopting 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 purchasing and consuming alternative proteins. 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.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Agriculture – Operations industry is a 15-stock group within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #148, which places it in the bottom 41% 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 dull near-term prospects. 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 resulted from a negative aggregate earnings outlook for the constituent companies. Looking at the aggregate earnings estimate revisions, analysts are gradually losing 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 look at the industry’s recent stock-market performance and valuation picture.
Industry vs. Broader Market
In a year, the Zacks Agriculture – Operations industry has underperformed the S&P 500 and the Zacks Consumer Staples sector.
The stocks in the industry have collectively fallen 34.7% in a year against growth of 15.8% for the Zacks S&P 500 composite. Meanwhile, the sector has declined 8.8%.
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 agriculture – Operations industry is currently trading at 11.19X compared with the S&P 500’s 19.26X and the sector’s 16.92X.
Over the last five years, the industry has traded as high as 17.51X, as low as 10.5X and at the median of 14.52X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
4 Agriculture Operations Stocks to Keep an Eye on
One stock in the Zacks Agriculture – Operations universe currently sports a Zacks Rank #1 (Strong Buy), and one other stock has a Zacks Rank #2 (Buy). Here, we suggest two other 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.
Dole: This Dublin, Ireland-based global leader in fresh produce is poised to benefit from improved logistical efficiencies in several areas, which brought increased stability to its core fruit business. The company’s diverse sourcing network and advanced farming practices are likely to help overcome the potential weather challenges in various regions. The company benefited from a healthier supply and demand balance in the first half of 2023, which allowed for a better pricing environment in Europe and much-improved selling conditions in the non-core markets.
The Zacks Consensus Estimate for Dole’s 2023 earnings has grown 4.8% in the past 30 days. The Zacks Consensus Estimate for its 2023 sales suggests a decline of 11.8% from the year-ago period’s reported figure. The consensus mark for earnings indicates 12.4% year-over-year growth. The company delivered an earnings surprise of 78.3%, on average, in the trailing four quarters. The DOLE stock has gained 13.3% in the past year. The company currently flaunts a Zacks Rank #1.
Price and Consensus: DOLE
Adecoagro: This 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 high asset flexibility, which gives it a competitive advantage in the current uncertain market outlook. Its flexibility is reflected in 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 consolidating the five-year plan investments made in Crops, Rice and Dairy businesses, along with its focus on efficiencies.
The Zacks Rank #2 company’s shares have rallied 40.2% in the past year. The Zacks Consensus Estimate for AGRO’s 2023 earnings has risen 9.6% in the past 30 days to $1.14 per share. The Zacks Consensus Estimate for the company’s 2023 EPS suggests growth of 0.9% from the year-ago period’s reported figure. The consensus mark for sales indicates a 6.7% year-over-year decline.
Price and Consensus: AGRO
Archer Daniels: This Chicago, IL-based agricultural product company’s leadership in critical global trends, such as flexitarian diets, nutrition and sustainable materials, has contributed to its momentum. Its focus on investing in assets and technological capabilities to serve customers efficiently is likely to be a significant growth driver. Solid demand, improved productivity and product innovations have been driving growth. Its Readiness program, positive cash flow and solid performance at the Nutrition unit have been aiding the results. The Zacks Rank #3 company has been progressing well on its three strategic pillars — optimize, drive and growth.
Archer Daniels 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’ 2023 earnings has increased 0.4% in the past 30 days to $7.26 per share. The Zacks Consensus Estimate for ADM’s 2023 sales and earnings suggests declines of 6.4% and 7.5%, respectively, from the year-ago period’s reported figures. It delivered an earnings surprise of 16.9%, on average, in the trailing four quarters. The company has lost 24.1% in the past year.
Price and Consensus: ADM
Corteva: This 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 2023 earnings has moved down 5.8% in the past 30 days. The Zacks Consensus Estimate for its 2023 sales and earnings suggests declines of 1.4% and 2.3%, respectively, from the year-ago period’s reported figures. The Zacks Rank #3 company has delivered an earnings surprise of 51.1%, on average, in the trailing four quarters. The CTVA stock has declined 30.3% in the past year.
Price and Consensus: CTVA