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

AGT Food And Ingredients Still Catching Up

Toiling in relative obscurity hasn't really hurt Canada's AGT Food and Ingredients (OTCPK:AGXXF) (AGT.TO), as this leading processor of lentils and other pulses has seen its shares climb more than 40% over the past year and 150% over the past three years. I've been a fan of this company for some time now given its efforts to add capacity in higher-margin businesses like good ingredient production, but I thought the valuation was getting a little steep back in April, and the shares are more or less flat since that last update (though with a 15% dive in the interim).

At this point, I'm still ambivalent about these shares. I like AGT's efforts to build out its higher-margin ingredients lines, and I think a strong Canadian pulse crop bodes well for next year, but this company has never been good about generating free cash flow and management's periodic comments about the business lead me to wonder if there's really a solid long-term plan in place. I think a price in the high 30s (in Canadian dollars; the Canadian shares are much more liquid and I'd recommend investors buy these if possible) is appropriate today and I'd need another dive into the low C$30s to really get excited about buying shares.

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AGT Food And Ingredients Still Catching Up

Seeking Alpha: AGT Food And Ingredients May Need Some Time To Digest Its Gains

One of the toughest things to do with a successful stock is to decide when enough is enough and a stock has overshot its mark. AGT Food and Ingredients's (OTCPK:AGXXF)(AGT.TO) shares have risen another third over the past six months, continuing a very healthy run for one of my favorite stocks in the food space. Better still, these gains aren't built on smoke and mirrors - the company has continued to make very real progress with its higher-margin food and ingredient lines and has considerable room to expand from here.

Selling a winner too early can be painful, and I don't think AGT is ridiculously overvalued. Rather, I just don't think it's notably undervalued anymore and that transitions it more to a hold (or maybe a "sell if you need the cash for something cheaper") in my view. I do believe that the company can generate long-term revenue growth in the mid single digits or higher, but I have a hard time seeing how the FCF margins ever go much past the mid single digits; even the specialty food/ingredients business is likely to be a sub-10% FCF margin business over the long term.

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AGT Food And Ingredients May Need Some Time To Digest Its Gains

Seeking Alpha: AGT Food And Ingredients Still Offers Interesting Upside

Canada's AGT Food and Ingredients (AGT.TO)/(OTCPK:AGXXF) has two characteristics that I really like in a publicly traded company - it does something that most investors find mind-numbingly tedious (sorting and processing pulses) and it is shifting its business up the value chain. I can't say that these efforts have gone unnoticed, as the shares are up about 7% since my last article and up 78% since my first article on the company for Seeking Alpha, but I believe the company's leadership position in pulse processing and nascent efforts in food ingredients can generate enough cash flow growth to make these shares interesting on a long-term basis.

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AGT Food And Ingredients Still Offers Interesting Upside

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: 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

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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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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