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Jan. 4, 2011 Source: Agri Marketing magazine In its December 27, 2010 issue, Fortune magazine lists its "10 Best Stocks For 2011." Three of them major players in the ag industry - Mosaic, Agrium and Dow Chemical (parent company of Dow AgroSciences). Here's what Fortune had to say about each: Mosaic: As corn goes, so go the makers of fertilizer. That's good news for Mosaic, whose stock has had an 89% correlation with corn prices (if 100% means mirroring them exactly) during the past five years, according to SIG Susquehanna agriculture analyst Don Carson. The price of corn has jumped 25% over the last 12 months, and inventories are at their lowest since 1995. The reason: Heavy rains and scorching heat caused the 2010 harvest to decline 4% from 2009 - even as demand rose, with ethanol now consuming 41% of the U.S. corn crop and growing wealth in developing countries leading to increased food consumption. Mosaic is up only 11% for the year, which means it is has some catching up to do. And with analysts expecting a 48% earnings rise in 2011, the stock (which trades at 15.4 times those estimated profits) seems primed to flourish. Agrium: The basic arguement for Agrium is similar to Mosaic's: Increased production of biofuels combined with rising global food demand means more need for fertilizer. But with Agrium that's only half the story. Natural gas represents 80% of the cost of manufacturing Agrium's primary product, nitrogen fertilizer - and the price of natural gas has fallen 50% since 2008. With U.S. gas production rising because of massive, recently exploited "shale gas" fields in Louisiana, Pennsylvania, and Texas, the International Energy Agency expects a gas "glut" to further depress prices n 2011. Agrium is not only a manufacturer of fertilizer but a retailer of it as well, as the company operates a 1,200-location chain of farm-product stores in six countries. This, says Richard Kelertas, an Ag Sector Analyst at Canada's Dundee Securities (Agrium is headquartered in Calgary), allows the company to capture more of the spread between falling production costs and rising retail prices. "It's also a stable business with better margins," Kelertas says, noting that customers are buying not just products but services. "If the farmer is spending a lot of money on specialty seeds and fertilizers, he's not going to want to have inefficient application systems." Agrium's earnings are on pace to jump 60% in 2010, and analysts are expecting another 44% bump next year - giving Agrium's stock a forward P/E of 11.8. Dow Chemical Cheap natural-gas prices are also a boon for Dow Chemical, which uses a key gas byproduct to make ethylene, a building block for the chemicals used to make plastic, rubber, paint, pharmaceuticals, detergents, and countless other products. "They've gone from being in the 80th percentile in terms of cost of production to the 20th percentile," says Fund Manager Tom Marsico, who counts Dow as a top 10 holding in his Marsico Focus and Marsico Growth funds. Dow is also making hay in its agrosciences division; boosted by new SmartStax hybrid corn seeds that Dow co-developed with Monsanto, the division's operating profits are on pace to rise 14% in 2010 and another 16% in 2011, according to Credit Suisse Analyst John McNulty. Companywide, Dow's gross margins have improved from 13% to 19% over the past two years. Long-term debt has been pared by $4 billion. And analysts expect 2011 earnings to be up 32% - on the heels of a 212% earnings improvement this year. (Granted, 2009 was a disaster.) Best of all, Dow's stock isn't priced to reflect the growth company it has become. The share's forward P/E is just 12.8. Says Marsico: "This is now a stock with a real long-term tailwind." Tweet |
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