Adecoagro Hit Hard By A Weakening Outlook For Ethanol And Sugar Production

Brazil’s Adecoagro (NYSE:AGRO) is a good case-in-point that a commodity company can do everything right (or at least do many things right) and still see larger commodity and economic trends, and investor worries about those trends, undo that hard work. Adecoagro, for its part, as long been a low-cost producer of sugar and ethanol (or SEE) in Brazil, as well as a low-cost producer of grain and other agricultural products in Argentina, but it has meant basically nothing for long-term investors, as annualized returns over the last three, five, and 10 years is basically flat to negative.

I was bullish on the prospects for Adecoagro to leverage attractive energy, sugar, and crop prices into solid cash flow that would be returned to shareholders in the wake of completing a major multiyear investment program. While the company has indeed instituted a dividend and buyback, the shares are still down about 15% since that last update – outperforming Cosan (CSAN) and Sao Martinho, but still down (and worse than the performance of other ag names like Cresud (CRESY) and SLC Agricola (OTCPK:SLCJY)).

The trouble with assessing Adecoagro today is that whenever you find yourself asking “how could it get worse?” with a commodity company, the market has an uncanny way of showing you just exactly how it could get worse. I do think that Adecoagro’s valuation is low, but with real concerns about ethanol and sugar prices over the next 12-18 months, as well as crop yields and profitability, this is a tough place to go bargain-hunting.

 

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Adecoagro Hit Hard By A Weakening Outlook For Ethanol And Sugar Production

Adecoagro Benefiting From Past Investments And A Tight SEE Market

 

Modeling Adecoagro (NYSE:AGRO) is a masochist’s dream. I mean, all you have to do is successfully model global sugar prices, regional ethanol prices, commodity crop prices, and weather in multiple areas of the world. Oh, as well as production costs, capex plans, and so on.

Super easy. Barely an inconvenience.

So far Adecoagro’s multiyear capex program, inventory management, and hedging strategies are looking smart, as the company is well-placed to leverage rising commodity prices. Why are the shares down from an early summer high close to $12? I assume it’s because of management’s acknowledgement that frosts would reduce crushing output this year. There are risks that the weather impact to Adecoagro’s output could be even worse, but I think the high prices offer at least some coverage and I think these shares remain undervalued.

 

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Adecoagro Benefiting From Past Investments And A Tight SEE Market

Adecoagro Set For Stronger Cash Flows As Capex Scales Down And Multiple Commodities Are At Multi-Year Highs

There’s really no such thing as stability when it comes to commodity markets, and so it is with Brazilian ethanol and sugar producers like Adecoagro (AGRO) and Cosan (NYSE:CZZ), as rocketing ethanol prices are likely to start incentivizing at least a partial shift back toward ethanol production. In the meantime, Adecoagro is also enjoying strong crop prices and expanded production capacity as it exits a five-year investment program.

Trying to predict multiyear crop and commodity prices is a fool’s errand, and so I try to focus instead on identifying the better operators. Adecoagro is absolutely one of those, with consistently better-than-average production costs for both its farming products and its sugar/ethanol operations. With expanded and enhanced production capacity and lower future capex, I’m looking for an upturn in free cash flow and capital returns to shareholders, and I believe the shares remain undervalued.

 

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Adecoagro Set For Stronger Cash Flows As Capex Scales Down And Multiple Commodities Are At Multi-Year Highs

Adecoagro Finally Getting Its Due As The Street Wakes Up To The Story

You never know when a fundamentally undervalued situation will suddenly flip; the Street can be stubborn and seemingly illogical for frustratingly long periods of time. Whatever made investors finally reexamine Adecoagro (AGRO), I’m glad to see it, as the shares are finally reflecting more of the underlying value that I’ve seen there for a little while. More likely than not, investors are waking up to the realization that 2019 is/was the end of a five-year capex investment cycle that suppressed free cash flow, not to mention some recent positive trends in both sugar and ethanol.

I still think Adecoagro is undervalued, but just not to the same extent as before. I believe the Argentina-related risks are manageable, and I’m fairly bullish on the near-term prospects for ethanol in Brazil. Sugar prices remain a wildcard, but it looks like the balance of factors is tilting more in the company’s favor than it has for a while.

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Adecoagro Finally Getting Its Due As The Street Wakes Up To The Story

Adecoagro Continues To Underperform Despite A Respectable Underlying Business

Adecoagro (AGRO) has been a frustrating name for quite some time, and one where nobody has really made any money on a long-term basis for the better part of three years. All of that comes despite a very efficient sugar/ethanol business, a low-cost farming operation, and a land bank that has consistently yielded healthy premiums to the appraised values. Weak sugar prices and volatile crop prices continue to do their damage, though, and it will take a little while longer before investments made into the rice and dairy businesses provide any real benefits.

This year (2019) will likely be the peak capex year for the company’s five-year capex plan, a plan that management believes will lead to EBITDA of around $400 million and FCF of $200M on a run-rate basis by the end of 2021. The Street continues to price in far, far less than that, though. I continue to believe that Adecoagro is undervalued on a long-term basis, but at some point it is fair to ask just how long investors can be expected to wait for that value to show up in the share price.

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Adecoagro Continues To Underperform Despite A Respectable Underlying Business

Adecoagro Has Its House In Order, But The Neighborhood Is On Fire

Although I had some concerns back in April about Adecoagro’s (AGRO) exposure to volatile commodity markets, particularly the oversupplied global sugar market, the shares have done better than I’d expected since then, with a 10% rise that not only beats Sao Martinho, but trounces Cosan Ltd. (CZZ). I believe Adecoagro has helped up better in part because of its low-cost sugar/ethanol operations, as well as its greater capacity to shift production toward ethanol at a time when sugar prices are so weak.

Looking ahead, the ongoing trade disputes between the U.S. and China should continue to help crop prices in Brazil and Argentina, while Adecoagro is also able to take advantage of weaker local currencies and a pretty solid hedging position. Moreover, I think the share price doesn’t reflect the progress the company has made over the years in improving its operations, nor the potential leverage to a larger dairy business. The commodity exposure increases the risk of this stock, but I do think the valuation remains relatively attractive.

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Adecoagro Has Its House In Order, But The Neighborhood Is On Fire

Adecoagro Continues To Invest In Growth Amid Brutal Commodity Pressures

My biggest issue with investing in Adecoagro (AGRO) has always been its vulnerability to commodity price swings, and those swings have been hammering the company and the stock over the last year. At the same time, management has continued to invest in projects that it believes will deliver meaningful long-term growth – the latest being the acquisition of Argentina’s largest dairy processor. 

Adecoagro has shown that it can run its diverse operations well, but efficient operations in sugar, ethanol, and farming can only go so far in the face of commodity price pressure. With that, the shares do still look undervalued, but the company’s exposure to commodity price risk may be too large for some investors.

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Adecoagro Continues To Invest In Growth Amid Brutal Commodity Pressures

Despite Ongoing Operational Improvements, Cosan Still Undervalued

Following and modeling Cosan Ltd. (CZZ) is a little like training for endurance sports - you spend a lot of time while you're doing it wondering why you're bothering to do it. After all, there are two share classes, a somewhat complicated holding company structure, and many commodity moving parts to account for in an analysis. With the shares up more than 30% over the last year and close to 250% from the 2015 lows, though, I think you can certainly argue that there has been some gain for shareholders willing to take on that pain. Better still, I continue to see upside in these shares from both operational improvement and a shrinking discount to the underlying value.

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Despite Ongoing Operational Improvements, Cosan Still Undervalued

Weak Commodity Prices Distract From Adecoagro's Positives

One of the frustrating things about investing in commodity companies is that individual companies can run themselves exceptionally well and still see those benefits largely chewed up adverse moves in the commodity markets they serve. Such has been the case with Adecoagro (NYSE:AGRO). Although Adecoagro has an enviable cost structure in both its sugar/ethanol and farming operations, weaker prices have undermined the company’s earnings power and pressured stock throughout 2017.

I still believe in the quality of Adecoagro, and I still believe that the shares are undervalued based on the company’s long-term FCF potential. Unfortunately, the vagaries of the commodity markets are such that it’s difficult to feel particularly strong conviction about any short-term forecast. That may not bother long-term investors who appreciate a solidly-run business with low costs, good global competitiveness, and attractively long-term growth drivers, but less patient investors may find the commodity-induced volatility is too much bother.

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Weak Commodity Prices Distract From Adecoagro's Positives

Weak Yields And Sentiment Weigh Heavily On SLC Agricola

While Cosan Ltd. (NYSE:CZZ) and Cresud (NASDAQ:CRESY) have shot up since the latter part of January, SLC Agricola (OTCPK:SLCJY) has performed more like Adecoagro (NYSE:AGRO) in going nowhere fast. Investors are no longer mad about buying up hard asset plays like farmland, and SLC Agricola has also seen historically bad weather whack its crop yields. Add in the fact that these ADRs weren't particularly liquid even in the best of times and you have a pretty uninspiring set-up for the shares.

Value remains a point of frustration with me. I can tell you that an independent appraisal values the company about 25% more than the market does even if you just look at land values and debt (and give no value to other company-owned assets or any potential appreciation through development). Likewise, a discounted cash flow analysis - typically a pretty ungenerous valuation approach for farming companies - suggests undervaluation of around a third.

It's tempting to think that this year's bad weather won't repeat again next year and that SLC Agricola's proven ability to generate above-average yields and develop its land will be better valued by the market in the future, but the illiquidity of the shares and uncontrollability of the business are both significant factors to consider.

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Weak Yields And Sentiment Weigh Heavily On SLC Agricola

Cresud May Be Undervalued, But Value-Creation Is Complicated

As was the case with Adecoagro (NYSE:AGRO), Cosan (NYSE:CZZ), and SLC Agricola (OTCPK:SLCJY), my last look at Cresud (NASDAQ:CRESY) came near a time of "peak panic" in the markets regarding the outlook for stocks in general and particularly companies exposed to shaky economies like Brazil and Argentina. While I thought that Cresud looked undervalued back in January, I also thought that all of the hassles regarding management's dealings with IDBD (through IRSA (NYSE:IRS), of which Cresud owns about 64%) weren't worth the trouble.

That was a mistake, as the shares have shot up more than 80% since then. Investors have, I think, gotten more comfortable that Cresud management is not going to plunder this company (or IRSA) to support IDBD (now operated as Clal Insurance and Discount Investment Corp.), but also more comfortable with the direction of Argentina's economy and the prospect that reforms to economic and agricultural policies will underpin stronger land values in the future.

I clearly undervalued IRSA when I last wrote about Cresud, in part because I was expecting more money to be diverted toward IDBD. Correcting that mistake and updating the valuation estimates for Cresud's farmland leads to a big boost in my fair value (to about $21.25). That still leaves meaningful upside, not to mention the long-term potential for higher land values and value creation through land development, but investors should note that consolidating the Israeli operations has made the reporting more complicated and speculation on land development is an inherently risky business.

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Cresud May Be Undervalued, But Value-Creation Is Complicated

Cosan Buoyed By Better Operating Results And Optimism On Brazil

If you really hate your brain and want to punish it, dig deep into Cosan Ltd (NYSE:CZZ). While this Brazilian-American conglomerate has a lot of positives going for it, including a strong position in ethanol and sugar production, fuel distribution, and rail in Brazil, it also has a complex holding company structure, a lot of debt, and a lot of moving parts to factor into any sort of valuation analysis.

My last update on Cosan took place right around the period of peak pessimism on Brazil, with both the stock market and currency around five-year lows. Since then, not only has Cosan seen stronger markets for ethanol and sugar, but more optimism about a recovery in Brazil and a stronger currency. The shares have soared more than 100% since my last update and yet I still think there could be upside left.

Adjusting for the company's capex plans, the recapitalization of Rumo, and the exchange rate, my fair value rises to around $11, suggesting meaningful upside is still possible. Keep in mind, though, that what the currency markets give they can also take back and Cosan is a high-beta play on Brazil, not to mention a complicated company in its own right.

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Cosan Buoyed By Better Operating Results And Optimism On Brazil

Adecoagro's Valuation Looks A Little Too Sour

When I last wrote about Adecoagro (NYSE:AGRO), I thought the company was in place to benefit from an improved political and economic situation in Argentina and its low-cost position in ethanol in Brazil, but I thought the valuation was less than compelling, and particularly next to Cosan (NYSE:CZZ) and SLC Agricola (OTCPK:SLCJY). Since that last article, Adecoagro shares have basically been flat while Cosan has soared, SLC Agricola has gone up a bit (around 16%), and another Argentine farming/farmland play, Cresud (NASDAQ:CRESY), has been quite strong.

At this point, I'm more bullish on Adecoagro again. While low global grain prices are a concern, prices have been quite healthy in the sugar and ethanol business. What's more, the company continues to periodically sell farmland well in excess of appraised value, and the economic reforms underway in Argentina make further appreciation a credible driver. With a fair value around $13.50 to $14.50, Adecoagro isn't shockingly cheap, but I think it is worth the elevated level of risk that goes with an emerging market commodity play.

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Adecoagro's Valuation Looks A Little Too Sour

Seeking Alpha: Cosan Ltd Looks Like Value The Hard Way

The shares of Cosan Ltd. (NYSE:CZZ) are hardly unique in being Brazilian shares that have done poorly over the past year, as Brazil's ongoing economic struggles and currency weakness have badly hurt many stocks. Cosan has a host of its own challenges, though, as investors wrestle with the prospects for Cosan SA's (CSAN3.SA) Raizen joint venture to improve profits and cash flow in the sugar and ethanol operators, as well Rumo's (RUMO3.SA) very weak share price and its prospects for raising much-needed capital on acceptable terms.

The positive spin on Cosan Ltd. is that it gives investors a one-stop exposure to one of the largest sugar and ethanol producers in the world, as well as a leading operator of gas stations in Brazil, a large natural gas distribution business, and a growing rail and port operator. The negative spin is that those sugar and ethanol operations have never generated great returns on capital and that the logistics operations need very large amounts of capital in the coming years. There's also a negative argument for complexity here - this is a tough business to model and the holding company structure creates risks and inefficiencies.

When it's all said and done, I believe that Cosan Ltd. is undervalued, but this is a good example of a stock where investors may find the return prospects significantly overshadowed by the risk and complexity. These shares can definitely outperform on a Brazilian economic recovery, but there are significant commodity, macroeconomic, and operational risks to consider.

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Cosan Ltd Looks Like Value The Hard Way

Seeking Alpha: Cresud And The Cost Of Complexity

With so many stocks out there for investors to choose from, I have never believed that investors are obligated to put up with confusing, complicated, or unfavorable situations just to generate a little extra return. That point has really been driven home at Cresud (NASDAQ:CRESY) in recent months, as investors have grown concerned about the relationship between Cresud's majority-owned IRSA (NYSE:IRS) and Israeli holding company IDB Holding (OTC:IDBZF) (IDBD.TA).

Given that IDB's debt is non-recourse to IRSA and/or Cresud, I'm not worried about IDB "ruining" CRESY, but I am concerned that management is stretching itself far and wide and really becoming much more of a diversified holding company. I suppose that's fine if that's what you want to invest in, but as a vehicle for investing in Argentina (and particularly Argentina's farmland), I'm not sure Cresud really fits the bill for me anymore.

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Cresud And The Cost Of Complexity

Seeking Alpha: Can Better Policies In Argentina Take Adecoagro Higher?

Agricultural and ethanol company Adecoagro (NYSE:AGRO) has been one of the few companies with significant operations in Brazil to do reasonably well over the last six months or so, although most of that outperformance has come since September. I've liked this company for a while, particularly because of its efficient sugar and ethanol operations in Brazil and its undervalued land assets in Argentina, and now it looks as though at least some of the macro factors influencing the company are pointing in a more positive direction.

Brazil's weak economy and weak currency remain real issues for the company, but Argentina's adoption of agriculture-friendly tax and policy reforms should offer a real boost to Adecoagro's farming results in the coming years. Weak global commodity prices remain a challenge, and it may take longer for Argentine land values to appreciate, but Adecoagro still looks modestly undervalued today.

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Can Better Policies In Argentina Take Adecoagro Higher?

Seeking Alpha: SLC Agricola Closer To Dirt Cheap

Like most equities in Brazil, reaching out to grab SLC Agricola (OTCPK:SLCJY) (SLCE3.SA) has been like grabbing a falling knife. While the local shares haven't done quite as bad (SLCE3.SA's shares down about 12%), the ADRs have fallen another 35% or so since I last wrote about the company, as the shares have been hit hard by a weak Brazilian real, some productivity challenges, and ongoing concerns both about Brazilian equities and farming companies in a lower commodity price environment.

The performance of Brazilian equities over the last year or so has been an abject lesson that things can always somehow manage to get worse. Even so, SLC Agricola's share price seems to reflect a level of pessimism that seems out of line with the real fundamentals. Although the company's land is consistently more productive than U.S. cropland when it comes to cotton and soy and not too far out of the running with corn, the market values SLCJY's land at nearly half the value of U.S. cropland. Even allowing that the challenges of the Brazilian market (including higher logistics costs) should demand a discount to U.S. values, I have to wonder whether the market isn't overly discounting the long-term value of SLC's farmland, and by extension, the shares of the company.

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SLC Agricola Closer To Dirt Cheap

Seeking Alpha: Cosan Is Complex, But Built To Win

The last year has been a bad one for Cosan Ltd (NYSE:CZZ). Despite strong positions in sugar, ethanol, fuel distribution, and logistics, a struggling Brazilian economy, a weaker Brazilian currency, lumpy results, and ongoing uncertainty over the complexity of the corporate structure has taken a toll on the shares. Down more than 40% over the past year (and since my last article on the company), Cosan seems unfairly maligned and overly discounted, but this will likely never be a stock suitable for investors who can't handle risk and volatility.

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Cosan Is Complex, But Built To Win

Seeking Alpha: SLC Agricola Whammied Well Below Fair Value

In the summer of 2013, I wrote about three South American agriculture companies as Top Ideas. Two of the three, Cresud (NASDAQ:CRESY) and Adecoagro (NYSE:AGRO), have done quite well since then, despite ongoing problems in Argentina. The third, SLC Agricola (OTCPK:SLCJY), has been a skunk - declining about 25% on a triple whammy of bearish ag sentiment, bearish Brazilian land value sentiment, and the depreciation of the Brazilian real (the local currency shares are up 4% over the same time).

At the risk of doubling down on a bad call, I think this reaction is overdone, and that there is some meaningful opportunity here. Calling a bottom in corn, cotton, and soybeans is risky, at best, and I do think it is too much to hope that Brazil's farmland will continue to appreciate at strong double-digit rates. Even so, I think SLC Agricola is getting too little credit for being a very efficient operator with significant underlying land value and the potential to leverage ongoing improvements in Brazilian's transportation infrastructure.

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SLC Agricola Whammied Well Below Fair Value

Seeking Alpha: Adecoagro's Diversity Sweetens The Value

These are rough times for both agriculture and Brazil, but Adecoagro (NYSE:AGRO) may yet be a stock that investors want to look at today. Calling a bottom in agricultural commodities is a fool's errand, but the company has more going for it than just the prevailing price of corn or soy. Adecoagro has established a quality sugar/ethanol/cogeneration operation in Brazil, and should be well placed to benefit from improving conditions. It is also leveraged to the extremely discounted farmland values in Argentina, and can benefit if a new government later this year pursues a more rational set of economic policies.

Adecoagro hasn't outshined Cresud (NASDAQ:CRESY) since mid-July of 2013 (when I wrote up both stocks as Top Ideas), but a 60%-plus improvement in the stock price since then still isn't bad. I believe that it is more than 10% undervalued just on the basis of its sugar/ethanol operations, and if economic reforms in Argentina allow the real underlying value of the company's farmland there to come to the surface, a fair value in the mid-to-high teens is not out of the realm of possibility.

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Adecoagro's Diversity Sweetens The Value