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How Green Are The Acres At Adecoagro?
It feels like a little bit of the bloom is off the rose that is farmland. About a year ago, farmland was one of the most talked-about investment options, and investors scoured the markets for names like Cresud (Nasdaq:CRESY), Bunge (NYSE:BG) and Syngenta (NYSE:SYT) to find some exposure to the market. While investors no longer have quite the same enthusiasm for these names, patient investors may want to come back around to Adecoagro (NYSE:AGRO). Agriculture is a tough, low-margin business, but short of putting together the considerable capital it takes to buy farmland, Adecoagro may be the next best thing for playing the increasing scarcity of arable land.
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An Ok Third Quarter
Variabilities in yields, pricing, forex and futures contracts make this company's quarter-to-quarter performance absurdly volatile, so a longer-term perspective is arguably best. Nevertheless, revenue rose 31% from last year, powered by 46% growth from farming operations and 24% growth from other activities, like sugar and ethanol processing.
Profitability was quite a bit better as well. Gross profit more than doubled sequentially (on a 9% sequential sales drop), and rose almost 900% from last year. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rose 92%, with farming EBITDA up 121% and sugar and ethanol EBITDA up 90%.
Farming saw strong improvements across the board. Not only did adjusted EBITDA from corn increase 40% and dairy doubled, but the company reversed year-ago losses in rice and coffee. What's more, that sugar and ethanol result was solid, despite disappointing yield and sugar (TRS) content. (For related reading, see EBITDA: Challenging The Calculation.)
Land Ho!
Part of the argument in buying stocks, like Cresud, BrasilAgro, Black Earth and Adecoagro, is the underlying value and appreciation potential of the arable land. To that end, investors may be encouraged in the 14% appreciation in the assessed value of AGRO's holdings. With those holdings worth an estimated $899 million and Adecoagro's enterprise value at about $1.2 billion, the ongoing agriculture and ethanol operations are nearly freebies. What's more, with rumors, all around, that major South American farm economies, like Brazil and Argentina, are considering further restrictions on foreign land ownership, scarcity value could come into play more.
The Ups and Downs of Ag
As investors have seen, in names as varied as Archer Daniels Midland (NYSE:ADM), Bunge, Alliance Grain Traders and Viterra, volatility is just endemic to the agricultural industry. Weather in your area will have a massive impact on yields, while weather everywhere else can have a major impact on prices. Likewise, processing margins are thin, and even small surpluses or shortages lead to disproportionate changes in profits. It's either a lot of fun or utterly maddening, depending upon your psychological make-up.
Farm prices are pretty supportive for Adecoagro right now. Moreover, even allowing for the severe year-to-year ups and downs (as seen last year and this year in wheat, for instance), it seems safe to assume that growing populations to feed, combined with shrinking supplies of arable land and usable water will make agriculture a good place to be for many years. In other words, Tyson (NYSE:TSN) and Adecoagro may see lower beef prices next year, or Sara Lee (NYSE:SLE) may benefit from lower raw coffee prices, but the long-term trends seem bullish.
The Bottom Line
I'm tempted to buy Adecoagro, either on its own or in tandem with a few other of the aforementioned names, with the notion that so long as management doesn't completely mismanage their assets, the land itself will support at least bond-like long-term returns from the stock. Moreover, some of the mania on farmland has cooled, but the underlying theses are still pretty positive - suggesting that this may be one of those pullbacks where savvy investors can build positions and benefit for the long haul.
Adecoagro isn't the easiest stock to follow or understand, and the accounting is a little quirky. But, the land that the company owns is real and valuable, and that may be the real key to long-term success in this stock. (For related reading, see 5 Commodities To Watch.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.
An Ok Third Quarter
Variabilities in yields, pricing, forex and futures contracts make this company's quarter-to-quarter performance absurdly volatile, so a longer-term perspective is arguably best. Nevertheless, revenue rose 31% from last year, powered by 46% growth from farming operations and 24% growth from other activities, like sugar and ethanol processing.
Profitability was quite a bit better as well. Gross profit more than doubled sequentially (on a 9% sequential sales drop), and rose almost 900% from last year. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rose 92%, with farming EBITDA up 121% and sugar and ethanol EBITDA up 90%.
Farming saw strong improvements across the board. Not only did adjusted EBITDA from corn increase 40% and dairy doubled, but the company reversed year-ago losses in rice and coffee. What's more, that sugar and ethanol result was solid, despite disappointing yield and sugar (TRS) content. (For related reading, see EBITDA: Challenging The Calculation.)
Land Ho!
Part of the argument in buying stocks, like Cresud, BrasilAgro, Black Earth and Adecoagro, is the underlying value and appreciation potential of the arable land. To that end, investors may be encouraged in the 14% appreciation in the assessed value of AGRO's holdings. With those holdings worth an estimated $899 million and Adecoagro's enterprise value at about $1.2 billion, the ongoing agriculture and ethanol operations are nearly freebies. What's more, with rumors, all around, that major South American farm economies, like Brazil and Argentina, are considering further restrictions on foreign land ownership, scarcity value could come into play more.
As investors have seen, in names as varied as Archer Daniels Midland (NYSE:ADM), Bunge, Alliance Grain Traders and Viterra, volatility is just endemic to the agricultural industry. Weather in your area will have a massive impact on yields, while weather everywhere else can have a major impact on prices. Likewise, processing margins are thin, and even small surpluses or shortages lead to disproportionate changes in profits. It's either a lot of fun or utterly maddening, depending upon your psychological make-up.
Farm prices are pretty supportive for Adecoagro right now. Moreover, even allowing for the severe year-to-year ups and downs (as seen last year and this year in wheat, for instance), it seems safe to assume that growing populations to feed, combined with shrinking supplies of arable land and usable water will make agriculture a good place to be for many years. In other words, Tyson (NYSE:TSN) and Adecoagro may see lower beef prices next year, or Sara Lee (NYSE:SLE) may benefit from lower raw coffee prices, but the long-term trends seem bullish.
The Bottom Line
I'm tempted to buy Adecoagro, either on its own or in tandem with a few other of the aforementioned names, with the notion that so long as management doesn't completely mismanage their assets, the land itself will support at least bond-like long-term returns from the stock. Moreover, some of the mania on farmland has cooled, but the underlying theses are still pretty positive - suggesting that this may be one of those pullbacks where savvy investors can build positions and benefit for the long haul.
Adecoagro isn't the easiest stock to follow or understand, and the accounting is a little quirky. But, the land that the company owns is real and valuable, and that may be the real key to long-term success in this stock. (For related reading, see 5 Commodities To Watch.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.
by
Stephen D. Simpson, CFA
Stephen D. Simpson, CFA, is a freelance financial writer, investor, and consultant. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog, and can be reached there.
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