Equity : Looking At Investments in Agricultural Chemical Stocks

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10/27/2017 | 07:22 pm
With the global growth narrative that seems to be top of mind today, and food being the primary requisite of a growing world population, many investors are not reticent to buy shares in the leading Agricultural Chemical stocks.
With the global growth narrative that seems to be top of mind today, and food being the primary requisite of a growing world population, many investors are not reticent to buy shares in the leading Agricultural Chemical stocks. So, we had to decide whether to add at least one to the 20 selections in our recently created Natural Resources portfolio. Today, we’ll write about the reasons why we elected to avoid this group.

The companies we reviewed are as follows (in alpha order):

AGU  Agrium Inc.
CF  CF Industries Holdings, Inc.
MON  Monsanto
MOS  Mosaic Co
POT  Potash Corporation of Saskatchewan Inc
SMG  Scotts Miracle-Gro Company

Big data supplier Intrinio provides a quick comparable summary of the four U.S.-headquartered companies in this list. As Potash Corporation of Saskatchewan and Agrium Inc are Canadian companies, Intrinio will not include those companies in its database until after year-end.

Additionally, Swiss pesticide manufacturer Syngenta (SYT) would have been included, but SYT has agreed to a $43 Billion take-over by ChemChina this year.

Interestingly, Syngenta’s review of Monsanto’s ill-fated attempt to acquire control of their company, which failed in June 2015, pointed investors to product line deficiencies in Monsanto they claim would likely have made those two a great fit. But it was not to be and ChemChina ended up acquiring Sygenta this year.

When compared to thousands of companies in the Thomson-Reuters and 4-Traders databases, which are also big data suppliers of fundamental data, we found the scores for all six of the companies we reviewed to be comparatively low-ranking. In other words, we could find many Natural Resources companies in the Energy and Basic Materials sectors that are much stronger fundamentally.

Our objective is to find the fundamentally strongest companies and invest in their shares based on timing considerations using technical indicators that are important to us.

In terms of the Fundamentals Rankings against a universe of thousands of companies followed by four or more analysts who report their findings, let’s have a look at the winners and losers. Our data is for the week of October 23.


Based on the fundamental data, we eliminated only Scotts Miracle-Gro (SMG) from our candidates list for investment. Then after various studies, we decided against investing in any of the other five.

So if anything, some of these companies may be considered relatively high dividend payers, which might at times play a role in prudent investment management, but even for Yield we believe there are better choices in the market.

Of all companies analyzed by our big data vendors Thomson-Reuters and 4-Traders, and ranked for Yield: Mosaic, Agrium, CF Industries and Potash are ranked 85%, 78%, 77% and 76% respectively, which are very good, while Scotts Miracle-Gro and Monsanto are at 59% and 54%, which are just mid-range among all stocks analyzed for Yield.

Recent data from Yahoo Finance shows that their dividend yields presently range from 3.85% for Mosaic company, 3.25% for Agrium, 3.30% for CF Industries, 2.07% for Potash, 2.15% for Scotts and 1.77% for Monsanto.

In summary, if it’s dividend yield you are seeking there are four of them that may meet your needs; however; if Total Return is a primary requirement, then we believe other factors mitigate against choosing any of this group.

Fundamental Rankings:

1.  Revenue Growth, which is based on the evolution of the turnover of the company between the last year and the three coming years according to consensus estimates. The higher the growth is (from a relative viewpoint), the better the rating is. The goal is to rank companies according to estimated sales and to identify companies with the highest growth.
a. Winners: CF Industries is the best of a slow growth industry
b. Losers: All the rest, but SMG and MON are extremely slow growers

2. Valuation, which is based on the ratio between enterprise value and its turnover for the current fiscal year and the next one. The lower the valuation is, the better the rating is. The goal is to rank companies according to valuation and to identify companies with the lowest valuation.
a. Winners: AGU and MOS are best; but, all are unimpressive
b. Losers: MOS is worst

3. Finances, which is based on the evolution of the net debt of the company (debt or cash) and its EBITDA, compared to its revenue. The higher the cash is, the better the rating is. The goal is to rank companies according to financial situation and to identify companies with the highest growth. The goal is to rank companies according to the quality of their financial situation.
a. Winners: MOS is best although 56% of all companies are stronger
b. Losers: All others are in the lowest 33%, so Finances is not an industry feature

4. Profitability, which is based on net margin of the company for the current year and the next one according to consensus estimates. The higher the ratio is, the better the rating is. The goal is to rank companies according to the “Net income/revenue” ratio to identify those which have a high payoff.
a. Winners: MON and POT are clearly the best, which reflects dominant product lines
b. Losers: Only CF is worse than average and it’s not good at all

5. Earnings quality, which is based on quality of past earnings released by the company compared to analysts’ estimates. The better earnings release is, the higher the rating is. The companies closest to the consensus will have an average score. The goal is to identify companies that publish regularly above consensus.
a. Winners: SMG and MON are fairly good
b. Losers: POT is poor and AGU is actually bad

6. Business Predictability, which is based on the dispersion of analysts' estimates on the evolution of the company business in the coming years (range estimates). The more estimates are concentrated, the more the rating is high. The goal is to rank companies according to the predictability of their business and identify companies whose business is highly predictable.
a. Winners: SMG is excellent
b. Losers: POT is poor, while CF is worse

7. Price Earnings Ratio, which compared the company’s current share price to its per-share earnings for the current fiscal year and the next one. The lower the PER is, the better the rating is. The goal is to rank companies according to their earnings multiples and identify those which are cheap.
a. Winners: AGU and MON are best and they are in bottom 50% of all companies; so this whole group is over-priced
b. Losers: CF and SMG are losing money

8. Potential, which is based on the average target price fixed by the consensus from Thomson Reuters. The higher the target price is, the better the rating is. The goal is to identify companies that have, according to analysts, the strongest upside potential.
a. Winners: Analysts say POT has excellent price potential, a reflection of having been beaten down
b. Losers: CF has very little price upside according to the analysts

9. Yield, which is based on the dividend relative to its share price. The higher the dividend yield is, the better the rating is. The goal is to identify companies that can supply a significant dividend return to their shareholders.
a. Winners: MOS, AGU, MOS and POT are all very good
b. Losers: All are better than average but MON is weakest on this score

10. Consensus, which is based on analyst recommendations. It provides an indication of the position taken by most analysts polled by Thomson Reuters. The goal is to identify companies that benefit from the maximum of buy (or sell) recommendations.
a. Winners: SMG is a company/stock the analysts seem to like
b. Losers: All are not bad, but MOS is lowest ranked

11. EPS revisions (one week), which is based on the evolution of EPS (earnings per share) revisions of the company for the current fiscal year and the next one. During the last week, more EPS estimates are revised upward (from a relative point of view), the more rating is high. The goal is to rank companies according to analyst estimates and to identify companies with the best EPS estimates.
a. Winners: CF recently reported excellent EPS growth off a losing period and POT was good
b. Losers: MOS and SMG are poorly ranked

12. EPS revisions (four months), which is based on the evolution of EPS (earnings per share) revisions of the company for the current fiscal year and the next one. During the last four months, more EPS estimates are revised upward (from a relative point of view), the more rating is high. The goal is to rank companies according to analyst estimates and to identify companies with the best EPS estimates. The difference is that the period of observation is based on fourth month instead of one week.
a. Winners: MON, ranked 82% is best while POT at 55% is a bit better than average
b. Losers: CF is very bad

13. EPS revisions (one year), which is based on the evolution of EPS (earnings per share) revisions of the company for the current fiscal year and the next one. The more EPS estimates are revised upward (from a relative point of view), the more rating is high. The goal is to rank companies according to analyst estimates and to identify companies with the best EPS estimates. The difference is that the period is three times as long as EPS revisions (four months).
a. Winners: MON, ranked 64% is best and the only one better than average
b. Losers: CF is very bad but all except MON and POT are less than average

14. Revenue revisions (four months), which is based on the evolution of revenue revisions of the company for the current fiscal year and the next one. The more revenue estimates are revised upward (from a relative point of view), the more rating is high. The goal is to rank companies according to analyst estimates and to identify companies with the best revenue estimates.
a. Winners: MON, ranked 78% is best and the only one better than average
b. Losers: SMG is bad while POT and CF are poor

15. Revenue revisions (one year) rating is based on the evolution of revenue revisions of the company for the current fiscal year and the next one. The more revenue estimates are revised upward (from a relative point of view), the more rating is high. The goal is to rank companies according to analyst estimates and to identify companies with the best revenue estimates. The difference is that the period is three times as long as Revenue revisions (four months).
a. Winners: MON, ranked 69% is best and the only one better than average
b. Losers: Most were disappointing

Other Studies

While the foregoing comparative review is important to us because it can be done so quickly, the valuation tools offered by Intrinio offer us an opportunity to evaluate these companies individually in greater detail.

Intrinio data includes actual and estimates for EPS and Revenue, and various metrics such as (i) Return on Invested Capital and Return on Earnings (ii) Net Working Capital and Liquidity, and (iii) Debt in order to calculate an Intrinsic Value of a company based on Discounted Cash Flow Analysis for comparison to its current equity market price.

This is a subject we intend to discuss in depth in future blogs and articles because in our view there is too much talk today of the death of value investing.

In any case, the Intrinio data concludes in the following results for the four U.S.-headquartered companies:


*  MOS is Margin of Safety
FCFF-based DCF Intrinsic Value Analysis by company

Monsanto

Mosaic

CF Industries

Scotts Miracle-Gro

However, at present, based on Discounted Cash Flow analysis, only Mosaic Company (MOS) shares have an Intrinsic Value greater than its equity market price, and Monsanto (MON) is trading at approximately its Intrinsic Value, whereas in the analysis of value investors the others are significantly over-priced in the market.

Summary

As quantitatively based, long-cycle investors, our primary job is to anticipate macroeconomic conditions in the future and make decisions on how these companies, as presently structured, will likely perform under those conditions. Our objective is to invest ahead of the crowd, when stock prices are out of favor, and to take gains at times we believe the prices have become inflated.

At this point, however, we see no fundamental data in the key industry players that reflects the financial strength or comparative value that we seek for buying entry positions. To us, the risk-reward balance is unacceptable, and if we did hold any of them we might consider timely exits of those positions. As we see it, long-term investors will likely experience lower prices over the next several quarters.

At favorable entry points in the long cycle, we would be inclined to invest in the shares of Monsanto (MON) and Potash Corp (POT), as these are the largest companies in this group and enjoy product domination. With a Forward Price/Earnings Ratio of about 19.6%, MON probably would be our foremost consideration, particularly if price were to drop some -25% from the present 120-122 level to the 85-90 range.

At present, based on Discounted Cash Flow analysis, Mosaic Company (MOS) shares represent the best investment value. However, to reiterate, we have no holdings among any of the stocks discussed today and no plans to invest in the next week.


Bill Cara
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