In this section, we’ve looked at two Agricultural stocks that we really like. Because we’re on the topic of Agriculture, it was only fitting that we selected two stocks that investors can buy right now. For one reason or another both stocks have caught our attention and we think investors should look to buy either of these stocks because the upside is compelling. When assessing them we look at the story behind these two companies and we assess them both fundamentally and technically. As with all stock, these too do carry risk which we urge you, as always, to consider.
Graincorp (GNC) – Is Australia’s second largest grain handler after ABB Grain. GNC is involved in the: storage logistics, marketing and processing of grains. It supplies grain and processed grain products to customers in domestic and international markets, with a focus on wheat, barley and canola. GNC also exports/imports grain and other bulk commodities. It services approximately 30,000 grain producers in QLD, NSW, VIC and SA. Approximately 175 country received sites with over 20 million tonnes of storage capacity and 7 port terminals with 15 million tonnes of elevation capacity. GNC Malt offers deep grain expertise and tailored relationships with the advantage of a single point of contact worldwide. GrainCorp Oils is an edible oils, bulk liquid terminals, feeds and used oil collection businesses in Australasia.Elders (ELD) – Is in rural services and automotive components. The company has a rich history and has over 175 years of agribusiness knowledge, experience, and advice. Started in 1839, Elders has been an integral part of Australia’s rural business landscape. It provides variousservices to primary producers, supporting their needs throughout the entire production cycle. From finance, banking, and real estate services to wool, grain and livestock trading, Elders provides innovative solutions and is heavily involved in all aspects of primary production. Rural Services operations supply the physical, financial and advisory inputs and marketing options to help Australian and New Zealand farmers. Automotive operations are conducted through Futuris, an Australian automotive components supplier and an emerging supplier to the Asia Pacific automotive industry. The company also provides real estate services which involves the marketing of farms, stations and lifestyle estates and insurance services for regional, rural, and metropolitan clients.
On the StockOmeter both stocks rate quite well. Both GNC and ELD come in at 73 but for different reasons. GNC looks more profitable and pays a dividend. It’s also a much larger company with a market capitalisation of $2.33bn. GNC’s ROE whilst not particularly high is rising whereas ELD’s ROE is falling. That’s a bit of a concern. This makes GNC a touch more expensive sitting on a PE of 23.15x versus ELD’s 7.64x.
GNC has broken out on the upside and is looking particularly attractive. Whilst the stock has been trading sideways since 2014, it looks like it may have finally broken this trend and is heading upwards. Investors should be buying on this break out. ELD on the other hand has been in a strong uptrend formation since 2014 and continues to track along this support line. The stock is starting to move away from its support line. We advise investors to buy at these levels before it gets away.
- Credit Suisse has a Neutral recommendation with a target price of $9.48. The broker says the 1H results were above expectations and there is significant upside to guidance due to crop projections for FY18. The oils business has also improved but market conditions remain challenging.
- Morgans has an Add recommendation with a target price of $5.05. 1H results were strong than expected and FY17 guidance has been upgraded. EBIT guidance is $66m from $60m. The broker thinks the stock is undervalued.
Both companies have their merits and as a result we like them both. Graincorp’s HY result really put it back in the game. Its earnings roared back boosted by a larger than expected Australian grain harvest and a lift in export volumes. NPAT rose to $90m from $20.4m a year earlier. That’s an increase of 341%. Earnings hit $236m up from $134m a year ago. The result was in line with its FY profit guidance for underlying profit of $130m-$160m. The company even doubled its interim dividend compared to last year’s payout. Revenue was up 19% to $2.46bn up from $2.07bn. The malt business is also kicking goals. GNC expects FY EBITDA to be up between $385m-$425m from $256m. GNC is a touch expensive on a PE of 23.15x but that’s OK because its ROE is forecast to rise from 2.97% to 8.57%. The stock is also paying a dividend following the largest crops ever recorded. Margins have normalised and FY guidance is conservative. GNC is now looking at free cash flow for the first time in 6 years. Most brokers are tipping a good crop for FY17. But it will all come down to weather, so its hard to predict. The chart is attractive following the upside break out. We suggest investors should buy now.Elders shares have also risen due to a bumper crop and record livestock. The same summer crop conditions that have helped GNC also helped ELD. Rising wool and livestock prices have helped boost the bottom line helping the company post a 1H profit rise of 56% to $38.3m up from $24.6m which was above expectations. The company said it is looking likely that it will pay dividends at the completion of this financial year. CEO Mark Allison says the resumption of dividends after a decade is the final step in the remaking of the company. Low interest rates and rising livestock prices were the perfect mix to boost demand for cattle farms and broad-acre cropping properties. This helped the company’s real estate division. The question is, will these high prices continue? Elders believes the high prices for sheep and cattle should push through into the 2H but may soften as volumes rose later in the year. There is also concern that rainfall to June could be lower thanexpected and temperatures warmer than expected. ELD expects FY earnings to be on the upper end of its previous forecast for $54m-$66m. Overall, Elders is back. It almost collapsed during the GFC under $1.4bn in debt. Since then it has managed to pull its Net debt to $170.4m. On fundamentals think ELD ticks all the right boxes. It trades on a high and stable ROE of 27% and the stock is relatively cheap on a PE of 7.64x. It has no yield but that might change at its next results in November this year. The chart is also attractive, ELD is in a solid uptrend formation and is tracking higher.
As we mentioned before, both stocks are weather dependent. If the weather persists, expect another bumper crop from both. We think either stock will make a great addition to your portfolio.