Digging In to Two Agricultural Plays

 | May 02, 2012 | 10:30 AM EDT  | Comments
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The first-quarter earnings season has been quite solid so far, with more companies than the historical average beating estimates in most sectors. But I have been particularly impressed with the agricultural sector so far. Several companies, including Agco (AGCO), Archer Daniels Midland (ADM) and Monsanto (MON), have easily beaten estimates and AGCO and Monsanto also lifted their guidance. A review of these earnings shows how strong the agricultural sector demand is right now.

Agco, which is one the largest agricultural equipment makers in the world, reported a stellar quarter Tuesday. Earnings came in at $1.21 a share, $0.35 above estimates, and $200 million above revenue estimates. Management raised fiscal-year 2012 guidance to $5.50 a share from the previous range of $5 to $5.07 previously. Most surprisingly, the company stated some of its strongest demand was coming from Western and Eastern Europe.

ADM profits fell but by much less than expected. Earnings after excluded items came in at $0.78 a share, much higher than the $0.59 that was the consensus estimate. The stock jumped 6% on release of the earnings beat.

Monsanto reported earnings of $2.28 a share, easily beating the consensus estimate of $2.12 a share. Revenues also came in around $140 million above estimates. The company raised guidance to $3.49 to $3.54 a share for fiscal 2012 up from prior guidance of $3.39 to $3.44 a share.

Of the three, I like AGCO the best, based on its valuation and because analysts consistently underestimate its earnings power.

Four reasons AGCO has further upside from $49 a share:

  • The company has now beaten earnings estimates for 13 straight quarters.
  • The stock is selling around 9x the new guidance for $5.50 earnings per share (EPS) in fiscal-year 2012, this is significantly below its five year average (15.8).
  • The 15 analysts who cover the stock have a median price target of $57 a share on the stock. I would look for these targets to be raised in coming weeks based on this latest report and the increased guidance.
  • Analysts are also expecting double-digit growth in revenue in fiscal-year 2012 and the market seems to undervaluing Agco's growth prospects given it has a low five-year projected PEG  of 0.68.

These strong earnings from these three agricultural stalwarts should bode well for other players in the sector that have not reported earnings yet. One I particularly like, based on its valuation and growth prospects, is Deere (DE).

Deere is a pre-eminent maker of agricultural and forestry equipment. It serves the same agricultural market as AGCO. The company has beat earnings estimates the last four quarters, so I would expect it to easily beat the estimates of $2.53 a share when it reports on May 16.

Four reasons Deere is undervalued at $83 a share:

  • Consensus earnings estimates for fiscal-year 2012 and fiscal-year 2013 have move up smartly over the last three months and analysts expect revenue growth north of 15% in fiscal-year 2012.
  • The stock has a five year projected PEG of below 1 (0.95), has an A rated balance sheet and yields 2.2%.
  • The stock is selling at below 10 forward earnings, substantially below its five year average (14.9).
  • The 17 analysts who cover the stock have a median price target of $94 on Deere. Credit Suisse has an Outperform rating on the stock and raised its price target to $97 from $93 on its last update.

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