5 Stocks to Watch on Robust Agriculture Operations Industry Trends

The Zacks Agriculture – Operations industry comprises companies that produce or procure, transport, store, process and distribute agricultural commodities to consumers. It also distributes ingredients to other parts of the agriculture industry (like clothing, animal feed, energy and industrial product). Some industry players engage in dairy operations, land transformation activities and the development of food ingredients using gene-editing technology. The industry encompasses production activities related to traditional farming of crops (like corn, soybeans, wheat and cotton), and livestock and poultry products (including meat, dairy and eggs). The products are mostly sold at grocery stores or exported overseas. These are also used as feedstock for other industries. For example, cotton is used in the clothing industry and corn is used in the ethanol industry.

What's Shaping the Future of Agriculture - Operations Industry

Growing Organic Demand: The industry has been benefiting from an organic movement prompted by consumers’ increasing demand for healthier food. Agriculturists are adapting to organic production techniques and curtailing the use of chemicals and pesticides. Innovations in food processing, improved grain handling techniques, larger storage spaces and strong emerging market demand are conducive to the industry’s growth. Healthy eating habits are likely to accelerate the purchase and consumption of alternative proteins. Moreover, focus on nourishment and wellness is pushing microbiome solutions to the forefront. The companies have been investing in acquisitions and joint ventures to build top-notch ingredients and solutions for meeting the demand for healthy products.

Strong Agricultural Export Projections: Per the U.S. Department of Agriculture, agricultural export projections for fiscal 2022 (ending Sep 30) indicate a record number of $191 billion, an increase of $7.5 billion from expectations released in February. The key factors resulting in higher export projections are increases in corn, cotton, and soybeans. Corn forecast of $19.1 billion indicates a $2.2 million increase due to robust volumes and higher unit values. Cotton exports are expected to be $9.0 billion, up $1.0 billion from the prior forecast on higher unit values. Soybean exports are likely to grow $1.0 billion to $32.3 billion as higher volumes more than offset lower unit values. Overall grain and feed exports are projected to be $3.8 billion higher to $46.7 billion, with gains across all commodities except rice. Total oilseed and product exports are estimated to be $700 million higher to $44.3 billion. Additionally, increases in the export forecast for livestock, poultry and dairy products are likely to be driven by gains across all major commodities, except pork.

Elevated Costs: Industry participants have been witnessing higher costs due to rising raw material, freight and logistics costs, including constraints in labor and trucking resources, leading to higher lead times for deliveries. Supply-chain concerns and commodity cost pressures have been affecting the profitability of agricultural companies for a while. Also, the conflict in Ukraine has been creating headwinds. The companies have resorted to solid pricing strategies to counter the rising raw material costs. The participants are looking to counter the global supply-chain challenges by entering partnerships and distribution strategies. Despite the pricing strategies, the challenges in supply chains and cost inflation are expected to continue hurting margins in the near term.

Companies in the industry continue to face higher SG&A expenses due to higher performance-related compensation, project-related costs, commissions, and variable compensation. The companies are also witnessing higher costs for investments in technology and innovation to stay ahead of the race. Continued deleverage in SG&A expenses might continue to have a bearing on the profitability of companies.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Agriculture – Operations industry is a 13-stock group within the broader Zacks Consumer Staples sector. The industry currently carries a Zacks Industry Rank #96, which places it at the top 38% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for the current year have increased 13.8%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry vs. Broader Market

The Zacks Agriculture – Operations industry has outperformed the S&P 500 and the Zacks Consumer Staples sector in a year.

The stocks in the industry have collectively gained 11.6% in a year against declines of 8.9% for the Zacks S&P 500 composite and 2.2% for the sector.

On the basis of the forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing Consumer Staples stocks, the industry is currently trading at 15.19X compared with the S&P 500’s 16.67X and the sector’s 19.28X.

Over the last five years, the industry has traded as high as 17.68X, as low as 10.24X and at the median of 14.37X, as the chart below shows.

Agriculture Operations Stocks to Keep an Eye on

None of the stocks in the Zacks Agriculture – Operations universe currently sport a Zacks Rank #1 (Strong Buy). Here, we have mentioned three stocks with a Zacks Rank #2 (Buy). We suggest two more stocks with a Zacks Rank #3 (Hold) from the same industry, which investors may hold on to. You can see the complete list of today’s Zacks #1 Rank stocks here.

Archer Daniels: The Chicago, IL-based agricultural product company’s leadership in key global trends like flexitarian diets, nutrition and sustainable materials has been a key contributor to its momentum. Its focus on making investments in assets and technological capabilities to serve customers efficiently is likely to be a significant growth driver. Its Readiness program, positive cash flow and solid performance at the Nutrition unit have been aiding results. The company has been progressing well on its three strategic pillars — optimize, drive and growth.

Management is optimistic about 2022 and envisions another year of strong earnings growth. It is poised to benefit from the robust performance of its Nutrition segment, owing to significant gains in the Human and Animal Nutrition units. The Zacks Consensus Estimate for Archer Daniels’ 2022 earnings has moved up 3.3% in the past 30 days to $6.33 per share. The Zacks Consensus Estimate for ADM’s 2022 sales and earnings suggests growth of 12.3% and 22%, respectively, from the year-ago period’s reported figures. It has reported an earnings surprise of 22.3%, on average, in the trailing four quarters. The company currently carries a Zacks Rank #2. It has rallied 26.9% in the past year.