The Zacks Agriculture – Operations 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. Logistic and supply-chain issues, higher input costs, and elevated operational expenses have been affecting 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, Corteva Inc. CTVA, Adecoagro S.A. AGRO and Alico ALCO.
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 product). 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 mostly 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.
What's Shaping the Future of Agriculture - Operations Industry
Growing Organic Demand: The industry has been benefiting 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 the purchase and consumption of 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.
Agricultural Export Projections: Per the U.S. Department of Agriculture, agricultural export projections for fiscal 2023 (ending Sep 30) of $190 billion suggest a decline of $3.5 billion from the prior forecast. Declines in soybeans, cotton and corn exports are the key factors resulting in lower export projections. Soybean exports are likely to decline $2.4 billion to $32.8 billion due to lower production and increased competition from South America. Cotton exports are expected to be $1 billion lower than the last forecast to $6 billion due to subdued demand and reduced volumes. Grain and feed forecast is likely to be $300 million lower to $46.2 billion, reflecting declines in corn, sorghum and rice exports. The forecast for corn has declined $600 million to $18.5 billion on lower volumes. Gains in beef, poultry and wheat are expected to offset these declines.
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. Also, the conflict in Ukraine has been creating headwinds. 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 forming partnerships and distribution strategies. Despite the pricing strategies, supply-chain challenges and cost inflation are expected to continue hurting margins 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 might continue to have a bearing on the profitability of companies.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Agriculture – Operations industry is a 14-stock group within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #167, which places it at the bottom 33% 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 outperforms 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 earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that 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 take a look at the industry’s recent stock-market performance and valuation picture.
Industry vs. Broader Market
The Zacks Agriculture – Operations industry has outperformed the S&P 500 and the Zacks Consumer Staples sector in a year.
The stocks in the industry have collectively risen 14.7% in a year against declines of 19.8% for the Zacks S&P 500 composite and 5.6% for the sector.
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 14.33X compared with the S&P 500’s 16.92X and the sector’s 18.94X.
Over the last five years, the industry has traded as high as 17.71X, as low as 10.24X and at the median of 14.4X, as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
4 Agriculture Operations Stocks to Keep an Eye on
None of the stocks in the Zacks Agriculture – Operations universe currently sports a Zacks Rank #1 (Strong Buy). Here, we have highlighted two stocks with a Zacks Rank #2 (Buy). Also, we suggest two 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.
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 key contributor to its momentum. Its focus on making investments 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 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’ 2022 earnings has moved up by a penny in the past seven days to $7.48 per share. The Zacks Consensus Estimate for ADM’s 2022 sales and earnings suggests growth of 19.9% and 44.1%, respectively, from the year-ago period’s reported figures. It has posted an earnings surprise of 26.2%, on average, in the trailing four quarters. The Zacks Rank #2 company has rallied 22.9% 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 been unchanged in the past 30 days. The Zacks Consensus Estimate for its 2022 sales and earnings suggests growth of 11.4% and 19.5%, respectively, from the year-ago period’s reported figures. The Zacks Rank #2 company has posted an earnings surprise of 19.8%, on average, in the trailing four quarters. The CTVA stock has rallied 28.7% 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 high asset flexibility, which gives it a competitive advantage amid the current uncertain market. 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’s shares have risen 6.9% in the past year. The Zacks Consensus Estimate for AGRO’s 2022 earnings has moved down 2.6% in the past 30 days. The Zacks Consensus Estimate for the company’s 2022 sales suggests growth of 9.4% from the year-ago period’s reported figure. The company has a Zacks Rank #3.
Price and Consensus: AGRO
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 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 widened in the past 30 days. The Zacks Consensus Estimate for ALCO’s current fiscal-year sales suggests a decline of 40.5% from the year-ago reported quarter. The loss estimate is pegged at 39 cents, whereas the company reported a loss of 21 cents in the year-ago period. It has posted an earnings surprise of 58.8%, on average, in the trailing four quarters. ALCO currently has a Zacks Rank #3. The company has declined 36% in the past year.
Price and Consensus: ALCO
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