AGT Food's Recent Stumble Has Created Some Indigestion, But Also An Opportunity As Expectations Reset

I had my concerns with AGT Food and Ingredients (OTCPK:AGXXF) (AGT.TO) back in October due to issues with the valuation and popularity of the stock and management's questionable strategic decisions, but I wasn't really expecting the 30% fall in the shares that has taken place. A lot of issues were pressuring the shares, including concerns about global harvest levels and harvest quality, Indian import actions, and growing impatience with the slow ramp of the Minot business, but the surprisingly weak first quarter results took 20% out of the stock relatively quickly.

Here, with AGT Food, we have a good example of the challenges that come with "buy the dip" advice. Stocks don't pull back 20%-plus relative to their benchmark index because everything is going awesome with the company. The trick, then, is to separate investor panic from real issues that mean investors should avoid a stock.

I am worried that AGT will have a rough year, as although I expect the second half of 2017 to be stronger, there will likely be some follow-on turbulence in the second quarter and maybe into the third. I also still don't really like the expansion of the bulk handling business, and I think there are some valid concerns as to whether the potential of the Minot-based ingredient business hasn't been overestimated by investors and sell-side analysts. All of that said, today's price assumes only mid-single-digit revenue growth and low single-digit FCF margins, and if AGT can ultimately lift margins closer to 5%, a fair value above C$36 is still in play.

Investors should be aware that the Canadian shares of AGT Food offer far greater liquidity and should be relatively easy to buy through most brokerages.

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AGT Food's Recent Stumble Has Created Some Indigestion, But Also An Opportunity As Expectations Reset

Seeking Alpha: AGT Food And Ingredients Is An Underappreciated New Growth Story

I've liked AGT Food and Ingredients (previously known as Alliance Grain Traders) (OTCPK:AGXXF)(AGT.TO) for a while now, but I didn't expect to see the 40%-plus move in the stock since my last article in May of 2014. Since that article, though, management has taken some noteworthy steps to further the company's ambitions in value-added processing, food, and ingredients - all of which does improve the company's future growth prospects and current fair value.

There are still some fundamental truths about AGT that some investors won't like - the ADRs aren't very liquid (and even the Canadian shares aren't highly liquid), this is still a competitive commodity-like business with thin margins, and issues like weather, international trade policy, and logistics can all influence results. All of that said, I think this is an underfollowed and undervalued story in the food space and I think the new direction of the company can lead to worthwhile returns for more aggressive investors for years to come.

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AGT Food And Ingredients Is An Underappreciated New Growth Story

Seeking Alpha: Graincorp Not Strikingly Cheap Amidst Multiple Challenges

Continuing my global tour of ag companies, today's subject is GrainCorp (OTCPK:GRCLF) (GNC.AX) - an Australian grain handling/storage company that is also a significant global player in malt and a regional player in edible oils. GrainCorp is probably best known as the target of Archer Daniels Midland's (ADM) unsuccessful takeover attempt in 2013, as the Australian government wanted to protect a "national champion" in a strategic sector.

GrainCorp doesn't appear to be the investment opportunity that I had hoped to find. Not only is the company facing near-term challenges from a potential El Nino weather cycle and global overcapacity in the malt industry, there is also growing competitive risk as rivals are building their own east coast port facilities. I do believe that GrainCorp still holds a lot of value for a company like ADM, and I believe the government of Australia could be more receptive to a takeover bid a few years from now, but I don't generally like investment situations where so much of the value is underpinned by future M&A potential.

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Graincorp Not Strikingly Cheap Amidst Multiple Challenges

Seeking Alpha: ADM Getting More Than The Usual Benefit Of The Doubt

Archer Daniels Midland (ADM) is a well-run giant in agricultural processing and logistics, but that is an inherently volatile business and one where Wall Street often runs hot and cold. Sentiment appears to be leaning "hot" these days, as the shares trade at a higher than normal EBITDA multiple and analysts talk more of "it's different this time" in ethanol while looking for crop availability and weather issues to reverse. At the right price I have been and would be a willing buyer of ADM, but it seems like a lot of positive sentiment is already in the shares at these levels.

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ADM Getting More Than The Usual Benefit Of The Doubt

Seeking Alpha: Alliance Grain Traders Still Pulsing With Opportunity

Alliance Grain Traders (OTCPK:AGXXF) (AGT.TO) has done alright since I last discussed the company, with the shares up about 15% over a period where the S&P 500 rose about half that amount and Archer Daniels Midland (ADM) rose about 6%. In that time, Alliance Grain Traders has faced some challenges related to rail logistics, but has also continued to make progress on its food ingredient and retail strategies. While this business is likely to remain a low-margin operation with meaningful year-to-year volatility, the shares don't seem to reflect the potential of the ingredients business.

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Alliance Grain Traders Still Pulsing With Opportunity

Seeking Alpha: Alliance Grain Traders Turning To Higher-Margin Opportunities

Canada's Alliance Grain Traders (OTC:AGXXF) (AGT.TO) already has a pretty decent business going for it. AGT is a global leader in the sourcing and processing of pulses (lentils, peas, beans, etc) and a vertically integrated processor with operations in Canada and Turkey. The company also happens to pay a respectable dividend.

It's not AGT's traditional processing operations that make this a stock worth following, but rather its emerging food ingredient and animal feed opportunities. These businesses hold the promise of not only meaningfully reducing the volatile cyclicality of the business, but also significantly upgrading its margins. Although I don't believe these shares are dramatically undervalued today, I'd keep an eye on them for the prospects of picking up shares on turbulence in the global pulse markets or a faster ramp of the value-added businesses.

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Alliance Grain Traders Turning To Higher-Margin Opportunities

Investopedia: ADM Offsets Weak Volume With Strong Ethanol

With ethanol margins improving in the second quarter and investors increasingly transitioning from the old (poor) crop to the new (good) crop, Archer Daniels Midland (NYSE:ADM) has caught investor attention again, and the stock is both near a 52-week high and up almost 50% over the past year. I do believe that the 2013 U.S. crop harvest will be good for ADM's 2014 handling, milling, and crushing operations, and I do believe ethanol is here to stay. That said, this is still fundamentally a volatile low-margin business and even with the opportunities added with GrainCorp, I would be careful about chasing the shares.

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Investopedia: Afer A Strong Recovery, What Moves ADM From Here?

I've had a love/worry relationship with Archer Daniels Midland (NYSE:ADM) for a while now, as I do believe that the Street is often too negative about a business that is admittedly very low-margin and unpredictable. With the stock up more than one-third from its November 2012 lows, though, it is harder to argue that the stock is unfairly neglected by the Street. Longer-term opportunities in Asia will take time to materialize, which makes a strong U.S. crop and the speedy close and integration of GrainCorp all the more important.

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Seeking Alpha: S&W Seed May Need A Breather, But The Potential Is Enticing

If you didn't grow up in a farm country, chances are the word alfalfa conjures images of either the off-key and cowlicked member of Our Gang or what you feed to rabbits and guinea pigs. As it happens, though, alfalfa is a large global crop worth about $8 billion a year and a major source of food for livestock. While S&W Seed Company (SANW) is a very small company today, the company has big plans to grow through added acreage, new products, and improved value capture.

These shares have had an incredible run, fueled in part by an acquisition and licensing agreement with Monsanto (MON), but likely also a sudden burst of sell-side coverage. While the shares may need to "rest" after a 50% jump over the last three months, it's not hard to generate impressive-looking growth estimates for this company.

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S&W Seed May Need A Breather, But The Potential Is Enticing

Seeking Alpha: FutureFuel Looks Undervalued, But Mind The Volatility

For most of the past decade, investors have been badly burned by energy-tech and bio-whatever. In many cases, investors bought into bad business models that were built more on hype than sound economic principles. Yet, throughout that time, ethanol and biodiesel use has continued to grow and the U.S. government has continued to encourage (and in many cases, mandate) increased use of these fuels.

That leaves the very small FutureFuel (FF) as an interesting, albeit very risky, stock to consider. Not only does FutureFuel have a real biodiesel plant up and running, but it uses a different feedstock than most if its competitors. FutureFuel also has a specialty chemical business that not only offsets some of the volatility of the biodiesel business, but also offers growth prospects in its own right.

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FutureFuel Looks Undervalued, But Mind The Volatility

Investopedia: Drought Shrivels ADM's Near-Term Prospects

The outlook for the agricultural sector has changed significantly since the first quarter of this year. While talk was of record corn plantings and a bumper harvest, adverse weather has made drought the word of the summer. As Archer Danields Midland (NYSE:ADM) transitions from the old crop year to the new crop year, the drought is likely to hit this business in a significant way. The long-term potential of ADM is still worthwhile, and investors ought to keep an eye open for overreactions on the down side, but the next few quarters are likely to be difficult at best.

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Investopedia: Alliance Grain Traders Needs To Make Better Use Of Its Assets

Ag processing can be difficult on a year-to-year basis, but companies like Archer Daniels Midland (NYSE:ADM) and Cargill have built solid businesses through scale and diversification. It's an open question as to whether Canada's Alliance Grain Traders (OTC:AGXXF) can achieve the same sort of long-term success. While Alliance is a global leader in the processing of pulses (lentils and the like), the company's lack of diversity and poor asset utilization have hampered results in recent years.

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Investopedia: ADM Working Through A Lull

One quarter ago, I opined that Archer Daniels Midland (NYSE:ADM) looked like a good stock for patient investors. With the stock having doubled the return of the S&P 500 over that brief time period, so far so good. ADM's business is always going to be a volatile, commodity-driven enterprise, but the company does earn long-term economic returns on an asset base that would be extremely difficult (and expensive) to replicate.

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Investopedia: No Quick Fixes At ADM, But The Value Is There

A quarter ago I was pretty positive on the shares of Archer Daniels Midland (NYSE:ADM). This was not so much because I saw a dramatic turnaround coming in the business, but because I saw it as a good long-term value. Although fiscal second quarter earnings show that there are still some very real challenges, investors really haven't hurt themselves by owning these shares as a long-term value.

Another Difficult (and Complicated) Quarter  
All in all, the fiscal second quarter was not very good for ADM. Reported revenue did rise 11% and the company posted gaudy-looking growth in oilseeds processing (up 28%) and corn processing (up 29%), while the huge ag services business saw a 1% sales decline.

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Investopedia: The Investment Case For Cresud

Individual investors who don't count themselves among those wealthy enough to be so-called "qualified investors" have pretty limited options for playing the growth potential in agricultural commodities. Certainly there are now more commodity-specific ETFs than ever before, and investors can choose from among funds like Teucrium Corn (Nasdaq:CORN), the iPath DJ-UBS Livestock ETF (ARCA:COW) or more diversified options, like the Market Vectors Agribusiness ETF (ARCA:MOO).

Beyond that, though, it gets more difficult. There are a respectable number of fertilizer, seed, equipment and agribusiness stocks out there, like Potash (NYSE:POT), Tyson (NYSE:TSN) and Archer Daniels Midland (NYSE:ADM), but what about land? Farmland has been one of the best-performing asset categories in recent years, but there are almost no investment options for the individual investor. Argentina's Cresud (Nadsaq:CRESY) is one of the few exceptions. (For related reading, see 22 Ways To Fight Rising Food Prices.)

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Investopedia: How Green Are The Acres At Adecoagro?

It feels like a little bit of the bloom is off the rose that is farmland. About a year ago, farmland was one of the most talked-about investment options, and investors scoured the markets for names like Cresud (Nasdaq:CRESY), Bunge (NYSE:BG) and Syngenta (NYSE:SYT) to find some exposure to the market. While investors no longer have quite the same enthusiasm for these names, patient investors may want to come back around to Adecoagro (NYSE:AGRO). Agriculture is a tough, low-margin business, but short of putting together the considerable capital it takes to buy farmland, Adecoagro may be the next best thing for playing the increasing scarcity of arable land. 

An Ok Third Quarter  
Variabilities in yields, pricing, forex and futures contracts make this company's quarter-to-quarter performance absurdly volatile, so a longer-term perspective is arguably best. Nevertheless, revenue rose 31% from last year, powered by 46% growth from farming operations and 24% growth from other activities, like sugar and ethanol processing.

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Investopedia: Can Sysco Sidestep The Squeeze?

When it comes to food distributor Sysco (NYSE:SYY), there certainly can be too much of a good thing. A controlled rate of food inflation is not a bad thing for this company, but when inflation gets too high, even a company as well-managed as Sysco can find that passing through all of those costs is more than their model can sustain. It's hard to imagine how Sysco won't be fine for the long haul, but the company may find it hard to maintain margins, during this period of turbulent food prices and stretched consumers.

A Mediocre Start to the Year  
Perhaps it's some testament to the quality and consistency of Sysco, that a couple pennies here or there have some analysts fretting about earnings quality, for this fiscal first quarter. At the top line, revenue growth of nearly 9% sounds pretty good, but that shine rubs off quickly. For starters, the company saw food inflation of over 7%, as well as kickers from acquisitions and foreign exchange. All in all, although the company reported that case volume rose more than 1%, underlying growth was actually ever so slightly negative for this quarter.

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Investopedia: Ups And Downs Par For The Course At ADM

Archer Daniels Midland (NYSE:ADM) is a good example of what is wrong about Wall Street today. In the short-term world of sell-side research and institutional investors, there is a great deal of angst over quarter-to-quarter moves and the volatility of commodity prices. Here's the long-term reality, though: processed food is here to stay and ready to explode in emerging markets, agricultural refining is an industry that rewards scale and ADM is one of the biggest fish in the ocean. (For more, check out What Is An Emerging Market Economy?)

A Tough Third Quarter  

ADM reported the sort of quarter that will have some investors doing double-takes. After all, 30% reported net sales growth seems amazing, for a company of this size. Reported growth was strong across the board: oilseed processing revenue rose 29%, corn processing revenue rose 51% and ag services revenue rose 33%.

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Investopedia: Kellogg's Diet Crashes

English poet William Blake, once said that you never know what is enough until you know what is more than enough. Kellogg (NYSE:K) management and shareholders can sympathize with that viewpoint, now that it looks as though the company cut much too deep with its "K-LEAN" cost-cutting initiatives. Although this is an embarrassing stumble for a sterling company, the bigger issue with the stock may be its valuation and its presently pokey overseas growth. 

A Disappointing Third Quarter  
Kellogg stock has long enjoyed a generous benefit of the doubt from the Street, largely because the company was seldom disappointing. This third quarter was a poor exception, though, as both sales and earnings faltered.

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Investopedia: Tyson Almost Ready To Serve

For the most part, the average investor should approach Tyson Foods (NYSE:TSN) with skepticism. It is the top player in America in its respective markets, but that has never translated into a sustained attractive margin structure or free cash flow record. On the other hand, savvy investors don't turn away from profit-making opportunities, and Tyson's stock may be very close to a point where there is real money to be made. 



Familiar Themes Dominate the Third Quarter  
Investors who have been following agribusiness are not going to see too many surprises in Tyson's fiscal third quarter results. Revenue was not too bad, as Tyson reported 11% sales growth on a combination of better-than 12% higher pricing and slightly worse than a 1% decline in volume. Sales growth was fairly balanced - all of the major categories had significant sales growth, with beef leading the way at 13.5% price increase. The relatively small prepared food business was the laggard at 9% growth.

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