The Zacks Agriculture – Operations industry has been dealing with the coronavirus-induced restrictions, including logistical and supply chain issues, leading to disruption in the supply of agro-food products to markets and consumers, both within and across borders. Also, the USDA’s agricultural export projections for fiscal 2020 reflect a decline from the prior estimate, even though trends may improve in fiscal 2021.
Nonetheless, the industry has been steadfast in catering to changing consumer preferences, including the surge in demand for healthier products. Also, investments in assets and technological capabilities to innovate and serve customers better bode well for players like Archer Daniels Midland Company (ADM), Corteva Inc. (CTVA), Cadiz Inc. (CDZI) and Yield10 Bioscience, Inc. (YTEN).
About the Industry
The Zacks Agriculture – Operations industry comprises companies that either produce or procure, transport, store, process and distribute agricultural commodities to consumers employee productivity monitoring tools and ingredients to other parts of the agriculture industry (such as the clothing, animal feed, energy and industrial products’ industries). Some of these players also engage in dairy operations, land transformation activities and the development of food ingredients using gene-editing technology.
The industry encompasses production activities related to traditional farming of crops (such as corn, soybeans, wheat and cotton), and livestock and poultry products (including meat, dairy and eggs). These products are mostly sold at grocery stores or exported overseas. Additionally, these are used as feedstock for other industries. For example, cotton is used in the clothing industry and corn is used in the ethanol industry.
What’s Shaping the Future of Agriculture – Operations Industry
Soft FY20 Agricultural Export Projections: According to the USDA, agricultural export projections for fiscal 2020 (ending Sep 30) are $135 billion, indicating a decline of $1.5 billion from May’s projection. The key factors impacting exports this fiscal year are anticipated reductions in horticultural, beef and veal, and soybean exports. The projections for fiscal 2020 are somewhat tempered by uncertainties surrounding the COVID-19 outbreak and its impact on the overall economic growth. However, USDA estimates agricultural exports of $140.5 billion for fiscal 2021, which indicates an increase of $5.5 billion from the revised forecast for fiscal 2020. The improved view is mainly backed by the increase in export forecasts for soybeans, corn, horticultural products, and livestock, poultry and dairy.
Interruption in Supply Chain: The industry participants have been rather stoic in the face of the challenges thrown by the coronavirus outbreak. There have been increased logistical issues, which have affected the supply chain across all regions. Most companies witnessed disruptions in the supply of agro-food products to markets and consumers, both within and across borders, hurting producers and suppliers. Agriculture, fisheries and aquaculture companies were particularly affected by restrictions on tourism, closure of restaurants and cafeterias, and the suspension of school meals. Meanwhile, production and farming continued unabated. Since consumers are largely relying on retail and e-commerce for their food needs, companies have been analyzing purchasing and consumption patterns to predict and meet demand. Comfort foods as well as healthy choices, driven by the eating-at-home and in-home baking trends, should result in continued robust demand for flour and baked goods.
Growing Organic Demand: The industry is benefiting from an organic movement prompted by consumers’ increasing demand for healthier food. Agriculturists are adapting to organic production techniques and curtailing the use of chemicals and pesticides. Further, innovations in food processing, improved grain handling techniques, larger storage spaces and strong emerging market demand are conducive to the industry’s growth. Healthy eating habits are likely to accelerate the purchase and consumption of alternative proteins. Moreover, focus on nourishment and wellness is pushing microbiome solutions to the forefront.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Agriculture – Operations industry is a 10-stock group within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #182, which places it at the bottom 27% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates dull near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for the current year has declined 17.1%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags S&P 500
The Zacks Agriculture – Operations industry has underperformed the S&P 500 but outpaced its own sector in the past year.
The stocks in this industry have collectively gained 7.1% compared with the Zacks S&P 500 composite that has increased 14.1%. The Zacks Consumer Staples sector has declined 5.4% over this period.
One-Year Price Performance
Agriculture – Operations Industry’s Valuation
On the basis of forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing Consumer Staples stocks, the industry is currently trading at 15.51X compared with the S&P 500’s 23.18X and the sector’s 20.27X.
Over the last five years, the industry has traded as high as 16.29X, as low as 10.6X and at the median of 14.33X as the chart below shows.
Price-to-Earnings Ratio (Past 5 Years)
4 Agriculture Operations Stocks to Keep a Close Eye On
While none of the stocks from the Zacks Agriculture – Operations universe currently holds a Zacks Rank #1 (Strong Buy), we have one stock with a Zacks Rank #2 (Buy). Additionally, we suggest three other stocks with Zacks Ranks #3 (Hold) from the same industry, which investors may closely watch. You can see the complete list of today’s Zacks #1 Rank stocks here.
Let’s have a look at them.
Yield10 Bioscience, Inc: The Zacks Rank #2 agricultural bioscience company is focused on developing new technologies to achieve improvements in crop yield to enhance global food security. The company is on track with the execution of its strategic plans for 2020 and beyond, including the development of Camelina as a commercial crop platform solution. Additionally, internal program testing in corn for the creation of hybrid corn, the recently signed non-exclusive research license with GDM for the evaluation of seed-yield traits in soybean and its 1-for-40 reverse stock split are factors likely to keep the stock going. The Zacks Consensus Estimate for loss for the current financial year has narrowed in the past 30 days. The stock has declined 85.4% in the past year.
Price and Consensus: YTEN
Archer Daniels Midland Company: The consensus 2020 EPS estimate for this Chicago, IL-based leading agricultural products company has moved north by 0.7% in the past 30 days. The company’s leadership in key global trends like flexitarian diets, nutrition and sustainable materials has been a contributor to its momentum. Additionally, its focus on making investments in assets and technological capabilities to serve customers efficiently is likely to be a key growth driver. This Zacks Rank #3 stock has gained 19.6% in the past year.
Price and Consensus: ADM
Corteva, Inc: The stock of this Wilmington, DE-based pure-play agriculture company, which was spun-off from DowDupont on Jun 1, 2019, has gained 6% in the past year. The company is poised to drive above-market growth through its industry-leading product pipeline and rigorous approach to innovation and operating discipline. Despite the pandemic-led volatility, strong price execution in seed, supply chain flexibility and solid market demand for its balanced and differentiated new product portfolios are driving the stock higher. The Zacks Consensus Estimate for 2020 has moved up by a penny in the last 30 days. The company currently has a Zacks Rank #3.
Price and Consensus: CTVA
Cadiz Inc: The Los Angeles, CA-based natural resources development company is engaged in the water resource and agricultural development activities in the San Bernardino County properties. The stock carries a Zacks Rank #3 and has declined 10% in the past year. The Zacks Consensus Estimate for the company’s 2020 bottom line has been stable in the past 30 days.
Price and Consensus: CDZI
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