Agriculture is one of the oldest industries in the world and is considered to be one of the most consistent and stable sectors, yielding steady returns over time. Last year’s drought in the U.S wreaked havoc on its crop yields, which led to the stellar financial performance of most agricultural companies. The weatherman is predicting that the dry spell isn’t over yet, which suggests that agriculture companies like Monsanto Company (NYSE:MON) could have another great year.
Growth prospects
Due to a shortage of supply, corn prices had skyrocketed to historic highs which is why corn plantations are still offering stellar ROIs. Naturally, farmers are more inclined toward maximizing their corn crop yields and are investing heavily in high-quality fertilizers and corn seeds. As a result, Monsanto Company (NYSE:MON)’s management is expecting to hit record corn volumes in FY 2013 and is targeting gross profits of $7.7-$7.8 billion in current year.
Management stated that its corn sales have increased by 19% YTD with strong global demand. As a result, the company’s quarterly sales and revenue rose by 15% and 11%, respectively.
In a bid to get ahead of its peers, management recently announced plans to expand its Chesterfield Village Research Center for $400 million. The facility is primarily used for idea generation and research work, and it’s estimated to create 675 new jobs and to be complete by 2017.
Although the expansion project won’t have an immediate effect on its earnings, the added workforce is expected to support lowering costs and increasing productivity, which would be beneficial over the long run. But then again, these are result-oriented and intangible impacts, which are speculative in nature.
Bang for the buck
Monsanto Company (NYSE:MON) is known to return value to its shareholders. The company has returned around $3.3 billion to its shareholders over the last three years, and currently has a $1 billion share-buyback program underway. The company repurchased $300 million worth of its shares in the previous quarter alone, and going by the pace of its buybacks, I believe Monsanto could exhaust the capital in the next two quarters. This leaves a pending repurchase of around 6.6 million shares with a buyback yield of 1.2%
Its dividend yield of 1.4% might seem insignificant, but Monsanto Company (NYSE:MON) has hiked its dividend payouts by 476% since 2004. With a modest payout ratio of 30.3%, cash and cash equivalents of $4.4 billion along with free cash flow (ttm) of approximately $2.5 billion, its dividend payouts seem rock solid with ample room for increases in the future.
Additionally, its low debt/equity of 17% and annual interest expenses of just $35 million suggest that the company can use its cash (and cash flow) for whatever reasons it may deem fit.
Peer talk
Amongst the fertilizer companies, CF Industries Holdings, Inc. (NYSE:CF) and Agrium Inc. (USA) (NYSE:AGU) lead the pack, but their shares have entered oversold territory due to rising natural-gas prices. Manufacturing nitrogen-based fertilizers requires the use of natural gas as an ingredient. Naturally if the cost of raw materials is higher, profit margins would be lower, which puts the bottom lines of CF Industries Holdings, Inc. (NYSE:CF) and Agrium Inc. (USA) (NYSE:AGU) under pressure.
But both companies have ample growth prospects to offset the shrinkage of margins. CF Industries Holdings, Inc. (NYSE:CF) is currently expanding its nitrogen-fertilizer production facilities in Iowa and Louisiana, which are expected to be fully operational by 2016 and 2015, respectively. The $3.8 billion in expansion projects is expected to boost its overall nitrogen-fertilizer production by 25%, and allow the company to meet rising nitrogen-fertilizer demand for years to come.
For the recent quarter, CF Industries Holdings, Inc. (NYSE:CF) posted an EPS of $7.40 against the estimated $6.94 and $6.66 in last year’s quarter. Although its quarterly revenue of $1.5 billion slid from $1.6 billion in last year’s corresponding quarter, analysts believe that CF Industries’ fair value stock price is $200, which calls for a 9% upside from its current price.
As far as Agrium Inc. (USA) (NYSE:AGU) is concerned, its single-largest stakeholder, Jana Partners (7.5% stake), was pushing the company to spin off a retail division. However, Agrium was able to win the legal battle against Jana Partners last month, which clears the roadblocks in the expansion of its retail network.
As of now, Agrium’s management has yet to make a statement regarding its expansion projects, but I firmly believe that its top brass will announce its plans very soon.
Agrium has cash and cash equivalents of over $1.8 billion with its free cash flow (ttm) of $837 million. That’s a solid liquid position considering that its annual dividend yield of 2.2% entails an annual payout of $299 million, which gets entirely covered by its FCF. Furthermore, the company operates with a modest debt/equity of 57%, with quarterly interest expenses of just $22 million.
Conclusion
In my opinion, all the three mentioned companies seem well poised to deliver high returns over the long run. Although shares of CF Industries Holdings, Inc. (NYSE:CF) and Agrium are down compared to their year-ago prices, investors should consider initiating long positions at low valuations with a systematic investment plan to hedge out the risks and spread the rewards. But if I had to pick one company, it would be Monsanto Company (NYSE:MON) due to its high ROIs, the unlocking of value and a clean record of impressive financial performance.
The article A Good Company With Great Growth Prospects originally appeared on Fool.com and is written by Piyush Arora.
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