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4 Agriculture Operations Stocks to Watch Amid Elevated Costs

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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 Corteva Inc. (CTVA - Free Report) , Archer Daniels Midland (ADM - Free Report) , Alico (ALCO - Free Report) and Adecoagro (AGRO - 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

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 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.

Agricultural Export Projections: Per the U.S. Department of Agriculture, agricultural export projections for fiscal 2024 (ending Sep 30, 2024) of $170.5 billion marks an increase of $1 billion from the November 2023 forecast of $169.5 billion. The export forecasts have been revised on exports of livestock and dairy, as well as grains and feeds. This is likely to more than offset the reductions in oilseeds and products.

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 13-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 us 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 16.4% in a year against growth of 25.7% for the Zacks S&P 500 composite. Meanwhile, the sector has declined 7.8%.

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 12.81X compared with the S&P 500’s 20.86X and the sector’s 17.82X.

Over the last five years, the industry has traded as high as 17.51X, as low as 10.6X 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), while none of the stocks have a Zacks Rank #2 (Buy). Here, we suggest three 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.

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 #1 company’s shares have rallied 35.4% in the past year. The Zacks Consensus Estimate for AGRO’s 2024 earnings has been unchanged in the past 30 days at $1.69 per share. The Zacks Consensus Estimate for the company’s 2024 EPS suggests growth of 16.6% from the year-ago period’s reported figure. The consensus mark for sales indicates 4.5% year-over-year growth.

Price and Consensus: AGRO

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 2024 earnings has moved down 0.7% in the past seven days. The Zacks Consensus Estimate for its 2024 sales and earnings suggests growth of 1.3% and 4.8%, respectively, from the year-ago period’s reported figures. The Zacks Rank #3 company has delivered an earnings surprise of 43.9%, on average, in the trailing four quarters. The CTVA stock has risen 1.7% in the past year.

Price and Consensus: CTVA

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’ 2024 earnings has declined 0.9% in the past 30 days to $5.60 per share. The Zacks Consensus Estimate for ADM’s 2024 sales and earnings suggests declines of 4.2% and 19.8%, respectively, from the year-ago period’s reported figures. It delivered an earnings surprise of 7.9%, on average, in the trailing four quarters. The company has lost 16.6% in the past year.

Price and Consensus: ADM

Alico: The Fort Myers, FL-based agri-business 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. This has significantly aided market pricing for 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 the next year to remain near or above the recent levels.

The Zacks Consensus Estimate for the current fiscal-year loss has been unchanged at $3.37 cents in the past 30 days, whereas the company reported a loss of $3.23 in the year-ago period. The Zacks Consensus Estimate for ALCO’s current fiscal-year sales suggests growth of 101.8% from the year-ago reported quarter. The ALCO stock has rallied 21% in the past year. The company currently carries a Zacks Rank #3.

Price and Consensus: ALCO

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