Manufacturing stock AG Growth has a positive outlook in 2019. Over the long run, the outlook for agriculture is also positive. The stock is a buy for gains and dividends.
Winnipeg-based manufacturing stock AG Growth International Inc. (better known as AGI) (TSX—AFN), did better than it seems in the first quarter of 2019. It’s expected to earn more in 2019. It’s investing to grow in new markets.
The long-term outlook for agriculture, and AG Growth International, is positive.
Chinese tariffs on crops from the US could also assist AGI somewhat, at least in the short run (see more below). The shares remain a buy for long-term capital gains and dividends that yield an attractive 4.5 per cent.
AGI calls itself a “leading provider of equipment . . . for agriculture bulk commodities including seed, fertilizer, grain, feed and food processing systems. AGI has manufacturing facilities in Canada, the United States, the United Kingdom, Brazil, France, Italy and India and distributes its product globally.” This product offering and geographical diversification reduces the company’s risk.
Still, North America remains the company’s main market. In the first quarter, Canada accounted for 36 per cent of total sales of $215 million; the US, for 43.5 per cent. Sales in the rest of the world came to just 20.5 per cent. AGI is, however, investing abroad.
In the first quarter, AGI earned an adjusted $5 million, or 27 cents a share. This was down sharply from adjusted earnings of $11.5 million, or 70 cents a share, a year earlier. In the first quarter, the company incurred much higher mergers and acquisitions expenses and other transactions and transitional costs. Then again, it also recorded big gains on financial instruments and foreign exchange.
AGI continues to grow
President and chief executive officer Tim Close said: “A very busy first quarter saw us close three important acquisitions. Our platform acquisition of Milltec in India provided AGI with expertise in rice milling . . . beginning a new era for AGI given the significant growth opportunities in the rice vertical in India and southeast Asia. The Bin Manager sensor network and Field Data Manager tools . . . opens new ways to add unique value for our customers. The acquisition of Improtech expanded our Food platform and provided AGI with additional expertise within the food and beverage industry.”
In the first quarter, contributions from these acquisitions and strong demand for AGI farm equipment raised the company’s sales. This offset the impact of poor winter conditions in much of North America and the “timing of international sales”.
AGI is optimistic about 2019. It writes: “Commercial backlog in Canada remains very strong due to continued investment in Canadian commercial grain handling infrastructure, including in port facilities and inland terminals.” AGI expects commercial activity to remain “stable” in the US, though it wrote this before the escalation of the trade war between the US and China.
China’s tariffs on crops and storage
China responded to US tariffs with tariffs of its own on US imports. China targeted the American farm belt that supported Trump. As a result, China will import fewer crops. This sent prices down for crops such as soybeans.
Rather than sell now, many farmers will store crops and wait for prices to recover. As a producer of storage equipment, AGI can profit. It writes, “Overall, AGI’s backlog for Farm equipment is higher than at the same time in 2018 and management anticipates . . . sales to increase over the prior year.”
But it depends partly on how long the tariffs are up. If these tariffs persist, then farmers may run short of cash to reinvest in their operations. This would run against AGI’s interests.
The long-term outlook is positive
The long-term outlook for agriculture is positive. The world population continues to grow. As some emerging markets become more affluent, more people are eating more and larger meals each day.
The company writes: “Offshore sales in Q1 2019 were the second highest on record and backlogs remain above the very strong of 2018.” AGI is expected to earn more in 2019.
This is an edited version of an article that was originally published for subscribers in the May 24, 2019, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
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The Investment Reporter •6/27/19 •