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Agricultural Stocks for '09

Posted: Dec 17, 2008 12:58 PM by Ben McClure

Tickers in this Article: DE, MOS, LNN, POT, MON

Companies that depend on farmers for their sales and profits went from boom to gloom in 2008 as commodity prices plunged. The industry is hurting; it's not been eviscerated like the banking industry, but nevertheless it has been a very rough ride for investors in seed producers, fertilizer companies and agriculture equipment makers.

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In the middle of tight credit markets, growers are having a harder time getting loans to cover the cost of buying seed, fertilizer and equipment. That's putting a damper on demand right now. But with stocks seeing levels that would have been unthinkable just months ago, some plucky investors might start putting their money down on the sector. After all, its long-term prospects are fairly solid. It's not as if people will stop eating just because there is a global recession. Eventually, good things will crop up for the sector.

So, here are a few companies to keep an eye on over the coming quarters.

Monsanto (NYSE:MON)
Monsanto has always been one of the 'go-to' companies in the agriculture industry. The agriculture biotech giant makes the customized seeds and herbicides that farmers need year after year to produce big, hardy crops. Trading 43% down from the high it reached this summer, the stock is now catching the attention of investors looking to take a position in the sector. In its latest figures, Monsanto announced record net sales of $2.05 billion for the fourth quarter of fiscal 2008, a 35% increase from last year, although earnings did come in at loss of 3 cents per share. Rest assured, the company is committed to doubling its fiscal 2007 gross profit by 2012 and holding to its dividend. Whether Monsanto's bottom has been reached is hard to predict, but the stock could be one to round up for long-term gains.

Potash Corp. of Saskatchewan (NYSE:POT)
Potash Corp. is the world's largest supplier of potash fertilizer. With potash prices plunging over the past year, that hasn't been a good thing. The stock is down more than 70% from the June peak, but management reckons things will turn around as demand for fertilizer outpaces supply in the next few years. Potash is moving forward with expansion plans to capitalize on what it expects will be a strong rebound in prices. If the company's predictions are correct investors getting in now stand to reap.

Mosaic (NYSE:MOS)
If you think Potash Corp. shares had a lousy 2008, then look at damage that potash and phosphate supplier The Mosaic Company has suffered. Its shares are down nearly 80% from the summer. The fall comes as Mosaic's inventories for phosphate, which makes up more than half of its sales, swelled to levels unimaginable earlier in the year. The resulting pricing pressure has forced dramatic production cuts that will dent revenues in the coming quarters. The good news is that Mosaic expects a strong spring season will boost results. Sitting on a pristine balance sheet, the company is positioned well for a rebound in prices and production. Perhaps the bad news is now plowed into the stock.

Lindsay (NYSE:LNN)
Down nearly 70% since June, irrigation systems maker Lindsay is another stock that has been crushed by the troubled agricultural market. Lindsay saw revenue double while per-share earnings nearly tripled to 90 cents diluted. Full-year results were nearly as fantastic. So, the market is clearly worried whether underlying demand for irrigation systems will hold-up under the credit crunch. If it's any consolation, beaten-down Lindsay could be in equipment giant Deere & Co's (NYSE:DE) sights as an acquisition target. The stock may be one to sow for seasons ahead.

Bottom Line
Dirt-cheap prices are creating long term investment opportunities in agriculture stocks. But with the outlook for credit markets and commodity markets still bleak, now is not the time bet the farm on the sector.

For related reading, see Harvesting Crop Production Reports.

By Ben McClure

Ben McClure is director of McClure & Co., an independent research consultancy. Before founding McClure & Co., Ben was a highly-rated European equities analyst at London-based Old Mutual Securities. He also spent several years as a business/technology journalist at the Economist Group. McClure graduated from the University of Alberta School of Business with an MBA.

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