Pat McKeough responds to many personal questions about specific stocks and other investment topics from the members of his Inner Circle. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for members of Pat’s Inner Circle.
This week, we had a question from an Inner Circle member on one of the prominent Canadian stocks in the agricultural industry. This firm specializes in grain handling and other equipment and does the greater part of its business overseas, in the U.S. and countries of the former Soviet Union. The company is buying up small firms and Pat examines whether these acquisitions and today’s sophisticated farming methods provide steady growth in an industry that is traditionally cyclical and fickle.
Q: Pat: Could you give me your opinion on Ag Growth International? Thanks.
A: Ag Growth International Inc., (symbol AFN on Toronto; www.aggrowth.com), is a leading maker of portable and stationary grain-handling, storage and conditioning equipment. The company is based in Winnipeg.
Ag Growth sells its products through dealers and distributors in 48 states and nine provinces, as well as overseas, including Russia, Ukraine and Kazakhstan. Ag Growth gets about 54% of its sales from the U.S., followed by Canada (27%) and international markets (19%).
Ag Growth’s subsidiaries include Batco (which makes crop conveyor belts), Wheatheart Manufacturing (grain-handling equipment), Westfield Industries (portable augers to transfer grain), the Edwards Group (aeration and grain-drying equipment), Twister (grain bins) and Mepu Oy (grain-drying systems).
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Ag Growth’s dividend yielding over 7%
In the three months ended September 30, 2012, Ag Growth’s sales rose 2.0%, to $83.5 million from $81.8 million a year earlier. Stronger sales to countries of the former Soviet Union (such as Russia, Ukraine and Kazakhstan) and western Canada offset a decline in U.S. sales resulting from last summer’s drought.
Even with the higher sales, cash flow fell sharply, to $8.5 million, or $0.68 a share, from $15.8 million, or $1.27. That’s because the products the company sells to overseas customers generate lower profit margins and cash flow than sales in the U.S.
On September 30, 2012, Ag Growth’s long-term debt was $143.4 million, or a manageable 35% of its market cap.
One of Ag Growth’s recent purchases is Nebraska-based Airlanco, for which it paid $11 million U.S. in October 2011. Airlanco is a private firm that makes fans, dust-collection systems and filtration equipment for companies that handle and process grain. Airlanco has added roughly $11 million to Ag Growth’s annual sales.
The stock trades at 8.8 times the company’s forecast 2013 cash flow of $3.72 a share. It pays a monthly $0.20 dividend, which yields a high 7.3% on an annualized basis. That payout appears safe.
In the Inner Circle Q&A, Pat examines the added risk of a stock whose business depends on crop conditions and harvest yields, which vary from year to year based on rainfall and other factors. He balances that risk against the higher acreage and crop yields of today’s farms thanks to improved land management and seed technology. He also examines the added risk of the company’s growth-by-acquisition strategy. He concludes with his clear buy-hold-sell advice on the stock.
COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members
Many analysts have been enthusiastic about agricultural stocks as governments around the world seek to multiply food production. Do you agree that this makes agricultural firms an attractive investment? Or do you believe that agriculture remains a risky and cyclical business that is better avoided? Let us know what you think.
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