Sunday, January 3

Week 235 - How Are Our 4 Key AgriBusiness Stocks Doing?

Situation: Ten weeks ago, we took a close look at the 20 largest AgriBusiness companies (see Week 225). We didn’t find much to love. When a commodity “supercycle” ends, it takes down all sectors, including oil & gas, mining, and agriculture. Nonetheless, we concluded that 4 AgriBusiness companies have strong enough balance sheets and wide enough marketing to “muddle through” this downturn. Each of the four firms we selected is a widely known and respected brand: Monsanto (MON), Hormel Foods (HRL), Archer Daniels Midland (ADM) and Deere (DE). Now that the commodity bear market has deepened, let’s look in on these companies to see how they’re holding up. 

Mission: Perform our standard spreadsheet analysis and make comparisons to relevant benchmarks (see Table).

Bottom Line: Hormel Foods (HRL) continues to outperform because of the “great meat rally.” Monsanto (MON) stock fell in price last year after a failed merger attempt with Syngenta (SYT) but is now recovering amid speculation that major agribusinesses will have to merge (given the imbalance between supply and demand for commodities). Indeed, duPont (DD) and Dow Chemical (DOW) have already agreed to do so. Archer Daniels Midland (ADM) and Deere (DE) are both in deepening bear markets due to a sharp fall in revenues. ADM coordinates agribusiness infrastructure worldwide but also gets ~10% of its revenues from ethanol production. That market is under pressure due to several factors, the most important being that a “blend wall” has been reached for blending gasoline that is 10% ethanol. No more ethanol is needed, and gasoline with 15% ethanol can’t be used in cars built before 2002. The blend wall became an issue because cars are increasingly fuel-efficient, and many car owners prefer not to use 10% ethanol. Deere (DE) manufactures heavy equipment for construction and mining in addition to the iconic green tractors and harvesters used in farming. All of those markets have collapsed now that China has largely completed its infrastructure buildout and is going through its own mini-recession. Another important market pressure is that consumers are getting fussier about how foodstuffs are produced and processed. These preferences are undermining the “factory farming” innovations that brought us cheap and abundant food, known as the “green revolution.” In summary, it looks like the AgriBusiness sector will remain under downward pressure for several more years.

Risk Rating: 8

Full Disclosure: I own stock in DE, ADM, MON, and HRL.

Note: Metrics highlighted in red denote underperformance vs. our key benchmark (VBINX). Metrics are current for the Sunday of publication.

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