Brazilian agriculture and ethanol company Adecoagro (NYSE:AGRO) has not had a good run as a public company. Not only is the stock down more than 30% from its January 2011 debut, the stock has noticeably lagged its Brazilian small-cap peers. Some of this can be chalked up to the unpredictable results of the company's farming operations, but worries about currency and the Argentine government have certainly done the company no favors. While this remains a risky investment prospect, bold investors may want to consider this name given its large apparent discount to fair value.
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Signs Of Life In Q4
Following Adecoagro on a quarter-by-quarter basis is tricky, as the company's farming and crushing operations are seasonal by nature. That said, the company did manage to close out a tough (and largely disappointing) year with a positive result relative to expectations.
Revenue rose 13% for the fiscal fourth quarter, with farming and land development revenue up 8%. Sugar, ethanol, and energy revenue improved by 18%, with a 50% jump in revenue from sugar driving the improvement.
Adecoagro also reaped more profitability for the fourth quarter. Overall adjusted EBITDA was up 184%, with farming EBTIDA up about 300%. Even without the sizable contribution of some sales-related gains, the farming business did return to profitability. Profitability was also significantly better in the sugar/ethanol business, increasing 87% from last year.
Sugar And Ethanol Likely To Drive Results In 2013
Investors are right to be at least a little nervous about Adecoagro's farming business. After all, the weather in Argentina has been dry and we all saw the impact of dry weather on the corn harvest in the U.S. last year. While companies like DuPont (NYSE:DD) and Deere (NYSE:DE) have been fairly optimistic about the long-term potential of South American agriculture, they sit at a different place in the value curve, and it's certainly worth remembering that farming (in and of itself) is not a high-return business.
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The good news for Adecoagro, though, is that farming is likely to be a less significant contributor to performance in 2013. Sell-side analysts are looking for sugar and ethanol to make up perhaps as much as 70% of EBITDA for the year, due in part to the start up of the company's Ivinhema mill and the company's advantageous position with its sugar hedges.
Is This Really More Of A Land Play?
It's well worth noting that few analysts go to great lengths to project the long-term profitability and economic returns of Adecoagro's farming operations. That isn't necessarily due to a lack of comps, as investors and analysts can benchmark the results from other agricultural operators like Cresud (Nasdaq:CRESY), SLC Agricola (OTC:SLCJY), and Brasilagro (NYSE:LND).
Rather, the reality is that crop farming is generally a business with relatively narrow long-term economic profits. As such, land value appreciation is an important part of the story here. Farmland values have generally shown solid appreciation in both Brazil and Argentina, but investors have marked down the value of Adecoagro's Argentine holdings due to the economic turmoil in that country and the risk of further drastic measures (the ownership of land is almost always a politically sensitive topic too). Still, with a recent sale of farmland in Argentina by Adecoagro coming at a price more than 10% above appraisal value, it would seem that the markets have over-corrected on the risks to Adecoagro's land value.
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The Bottom Line
Adecoagro is not going to be an easy stock to own, nor an easy company for investors to value. While institutional investors have access to information that allows them to derive net asset value (NAV) estimates based on the company's land value, it's much harder for individual investors to get that information. Likewise, the significant volatility of farming (whether from weather and crop yield or global prices), sugar, and ethanol all make this a tricky stock.
As it stands today, I think the underlying value of the company's farmland and sugar/ethanol operations argues for a fair value in the range of $12 to $15. That valuation certainly implies ongoing appreciation in the value of the company's farmland, but historically that's been a fairly safe assumption to make for the long-term. This is definitely a risky stock, but for patient investors who can ignore the quarter to quarter (and sometimes year to year) noise in the pursuit of underlying asset value, Adecoagro could still hold real appeal today.