Earnings outlooks for 2020 have set the prices of manufacturing stocks AG Growth International and Medtronic plc.
The shares of manufacturing stock AG Growth International (TSX—AFN) fell substantially in August, giving them downwards price momentum. Still, we expect the price to recover.
In 2019, AGI is expected to earn $2.26 a share. That would represent a profit drop of a third from last year’s $3.38 a share. Also, the company’s trailing P/E (Price-to-Earnings) ratio would reach 20.4 times.
In 2020, however, AGI’s earnings are expected to rebound by 45 per cent, to $3.28 a share. Based on this estimate, the forward P/E ratio is a reasonable 14.1 times. In addition, the company’s dividend of $2.40 a share yields an attractive 5.2 per cent.
AGI provides equipment for agricultural bulk commodities including seed, fertilizer, grain, feed and food-processing systems. It manufactures in Canada, the US, Britain, Brazil, France, Italy and India. It distributes its products globally.
Late planting and delayed harvest
AGI writes: “A very late planting in the US, combined with poor growing conditions in many regions resulted in a delayed harvest and concerns regarding yield and crop quality. In Canada, mixed growing conditions throughout the year and a very late harvest have led to similar concerns.” Early snow has kept some farmers from fully harvesting their crops. And China’s political ban on Canadian soybeans hurts.
In the nine months to September 30, Canada and the US accounted for 77 per cent of AGI’s total sales of $770 million. International sales accounted for the other 23 per cent. The international sales are growing in importance. That’s partly thanks to expected growth from this year’s acquisition in India.
Management is optimistic about AGI’s outlook. It writes: “While we faced certain headwinds in the second half of 2019, we look forward with excitement to increasing our pace of growth in fiscal 2020 (which coincides with calendar 2020).”
AGI remains a buy for long-term share price gains and dividends that yield a generous 5.2 per cent.
Medtronic sales, earnings, dividends keep rising
Shares of global manufacturing stock Medtronic plc. (NYSE—MDT) have jumped substantially since late spring. This gives them upwards price momentum.
Medtronic is the world’s largest manufacturer of implantable biomedical devices. The Cardiac and Vascular Group generated 38 per cent of last year’s sales of US$1.341 billion. The other 62 per cent of the sales came from its restorative Therapies Group, which includes spinal, neuromodulation, diabetes and surgical technologies.
We expect Medtronic’s shares to keep on going up for a number of reasons. Its earnings have risen year after year. They climbed even during the financial crisis and recession of 2008 and 2009. This gives the company the money to continue to raise its dividends, year after year. It remains a dividend aristocrat even under the more strict American criterion: dividends up in at least each of the latest 25 years.
Medtronic’s overseas markets are growing
Another positive development is Medtronic’s expansion into over 120 countries. Last year it generated 47 per cent of its sales outside of the US. We expect this to grow as expanding middle classes overseas are willing and able to pay for health care. Unlike impoverished Africa, which wanted free drugs to treat AIDS, most Asian countries can afford to pay. In fact, management said that it intends to further penetrate emerging markets.
Medtronic continues to invest in the development of new products. Last year, its R&D (Research & Development) investment totaled about US$2.242 billion. New revenue streams and cost-containment measures should keep raising Medtronic’s earnings.
In 2020, Medtronic’s earnings are expected to grow by 8.1 per cent, to US$6.01 a share. Based on this estimate, the shares trade at a forward P/E ratio of 18.6 times. Given the company’s ongoing long-term success, this multiple seems reasonable. Medtronic remains a buy for further long-term share price gains and modest, but growing dividends.
This is an edited version of an article that was originally published for subscribers in the November 29, 2019, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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