This Booming Business Could Grow Your Portfolio
After a hectic earnings-driven month, it's becoming increasingly clear that one industry is bucking the economic gloom: agriculture.
With most agricultural players -- be it fertilizer makers or equipment makers -- making good money in spite of the gloom, let's take a look at what's driving the agriculture boom and which stocks could help grow our portfolios
What is working for the sector?
No guesses here. Sky-high crop prices have been driving the world crazy, and the farming community has been happily pocketing the gains. The higher the prices, the higher the demand for fertilizer and equipment, and the higher the sales for related companies -- the equation is as simple as that. And it's not just crops. Prices for meat and dairy products have also hit high levels this year.
Bad weather is another factor to be accounted for. On the one hand it can hurt yield, but on the other, it helps boost crop prices because of the tighter supply. For instance, severe weather hampered cultivation in some areas for chemical player Agrium (NYS: AGU) , but higher prices helped its second-quarter revenue and profits jump 40% and 39%, respectively. Interesting, isn't it?
Now that you know what's working for the agriculture sector, let me give you the lowdown on how some of the agriculture-related businesses have performed in their most recent quarters. It's eye-opening.
One of the companies that quickly springs to mind whenever you think of agriculture is Deere (NYS: DE) . Like most farm equipment manufacturers who have posted strong Street estimate-beating numbers, Deere's agriculture equipment sales surged 22% in the second quarter on higher shipments and global demand, helping its bottom line grow by an impressive 15%.
Deere is eyeing expansion and has also raised its quarterly dividend. Worth a watch, isn't it?
CNH Global (NYS: CNH) is another company that was all smiles in its second quarter, with its agriculture equipment sales jumping 22% and its bottom line growing more than twofold from a year ago. Seventy-nine percent of CNH's sales come from agricultural equipment. Needless to say, the demand for such a company's products can give us an idea of the general market conditions.
CNH's debt-to-equity ratio may be high at 203%, but its expansion plans justify taking on so much debt. Considering the strong quarterly numbers, CNH is definitely enjoying the agriculture boom.
Help those plants
Fertilizers may be toxic to us, but they help plants -- and sales. Higher farming activity across the globe has boosted demand for nutrients and minerals that boost farm produce, and most fertilizer companies have reported hot numbers recently.
Terra Nitrogen's (NYS: TNH) second-quarter top line jumped 19%, driven by a 47% surge in selling prices of nutrients like ammonia. The company's bottom line shot up by a staggering 78% as a result. And the icing on the cake? An amazing dividend yield of 8.2%!
Mosaic's (NYS: MOS) numbers were no less exciting. Sales in both its potash and phosphate segments surged, taking the company's net profits up by 64% in its fourth quarter. Net income was also at record highs for the full year. High shipments, high prices, strong numbers, optimistic outlook -- indeed the "mosaic" is coming together.
Fertilizer companies found another reason to cheer recently, when Asia's third largest economy India agreed to import potash (a key nutrient with a tight market) at the currently prevailing high prices, something the country has not been willing to do for months. While the three big potash players -- Agrium, PotashCorp (NYS: POT) , and Mosaic -- will directly benefit, this move may push up potash prices further, thus benefiting other fertilizer companies as well.
Food companies also benefit from an uptick in agricultural activity.
Bunge's (NYS: BG) agribusiness got a boost from large harvests, helping its second-quarter revenue grow 32%. What's more, the company expects the growing trend to continue and is banking largely on its agribusiness to drive growth through the year.
Trade resumption in Russia has brought with it potential expansion opportunities for the food companies. Bunge is interested in the region, and so is ArcherDaniels Midland (NYS: ADM) , whose oilseeds and agricultural services segments did well in its fourth quarter.
Clearly, these companies are reaping the benefits of agriculture.
The Foolish bottom line
With business strong even in the face of an economic downturn, agriculture stocks look like a good bet. Moreover, with a growing global population, demand for food has the wind at its back.
Even if fertilizer prices come down on higher supplies, demand might pick up, boosting sales volumes for the companies. Hence, all might not be lost even if prices were to cool down.
Keep tabs on these companies by adding them to your watchlist.
- Add Deere to My Watchlist.
- Add CNH Global to My Watchlist.
- Add Terra Nitrogen to My Watchlist.
- Add Mosaic to My Watchlist.
- Add Agrium to My Watchlist.
- Add Potash Corp to My Watchlist.
- Add Bunge to My Watchlist.
- Add Archer Daniels Midland to My Watchlist.
At the time this article was published Neha Chamaria does not own shares of any of the companies mentioned in this article.Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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