Reap Profits On Food Stocks
As the world's appetite expands, share prices are up, but opportunities remain.
Soaring grain and meat prices, robust orders for machinery, and heartier diets among the once malnourished citizens of developing nations are feeding a global boom in agriculture.
But as comforting as it is to witness living standards improve around the world, investors may have already digested the best of this bounty. It’s a common bull-market problem: A prosperous industry is full of wonderful companies with terrific records, but it’s hard to find any with stocks that haven’t already been bid to sky-high levels.
See how food inflation affects your grocery bill with our infographic, The Rising Cost of Food.
The AgIndex of 21 blue-chip stocks, hatched by farm economists at the University of Illinois, has soared 103% since the stock market bottomed in March 2009. That’s slightly more than the gain of Standard & Poor’s 500-stock index (prices and returns are through May 6).
Food prices will continue to rise as long as populations and incomes grow briskly and the agriculture sector faces high production and distribution costs. Using corn for ethanol production is pushing up prices, too, as is grain traders’ relentless buying of futures contracts. At the same time, high grain and energy costs are biting into the profit margins of food processors and packagers, such as General Mills (symbolGIS) and Corn Products International (CPO), making their stocks unappetizing.
Some ag-related stocks are reasonably priced, among them Deere (DE, $92), the world’s largest producer of farm machinery. Because farm incomes are growing (they’re expected to set a record in the U.S. this year), Deere could double its annual sales, to $50 billion, by 2018 and keep piling up record profits.
Deere’s results used to be wildly inconsistent, dependent heavily on U.S. corn and wheat farmers. But now the company’s fortunes are tied to economic growth worldwide, and it is an active player in the fastest-growing emerging markets, including China and India. Its stock trades at 15 times estimated earnings of $6.24 per share for the fiscal year that ends this October, compared with an average price-earnings ratio of 18 for the farm-and-construction-machinery sector.
The Chinese eat half the world’s pork and serve it twice as often as all other meats combined. As food retailing in China transitions from local butchers to Western-style supermarkets, Zhongpin (HOGS, $16) is well positioned to profit. Zhongpin supplies fresh and processed pork under its brand name to supermarkets. Analyst Stephen Share, of Morgan Joseph TriArtisan, a New York City investment firm, says Zhongpin can boost sales and earnings by more than 20% annually over the nextthree to five years, while the overall Chinese pork market is expected to growjust 5% to 8%. Zhongpin issues financial results in dollars but operates exclusivelyin China, so it won’t be hurt directly if China’s currency continues to rise against thedollar and squeezes China’s exporters. Zhongpin trades at nine times estimated 2011earnings of $1.85 per share.
Stocks of fertilizer companies have been on a roll for most of the past five years, but they have more room to grow. Record demand for potash, a key ingredient in fertilizer, will continue to boost potash prices and lift sales and profits of the big players. Our favorite is the largest producer, Potash Corp. of Saskatchewan (POT , $53). Analysts expect Potash’s profits to soar 65% this year, to $3.36 per share.
If you prefer exchange-traded funds, you may find IQ Global Agribusiness SmallCap ETF (CROP) intriguing. The fund, which launched in March, holds fast-growingfirms, including Brazilian ethanol producer Cosan and Viterra, a Canadian supplierof fertilizer and feed for cows, hogs and chickens. The older Market VectorsAgribusiness ETF (MOO) invests in familiar names, with 24% of assets in Deere, Monsanto and Potash Corp.