Have you ever heard of the Palmer ZIndex ? Me neither.
But it's something we'll be hearing a lot about in coming weeks
and months. This measure, compiled by the National Climatic Data
Center, is a measure of soil moisture. And by the looks of things,
dozens of counties in the U.S. have very dry soil. You have to go
back to the 1950's to fund such parched conditions on a national
scale. As the nightly news tells us, crops are withering on the
vine, which is bad news for both consumers and the folks that make
a living on farms.
The expanding drought will likely affect your portfolio in myriad
ways. For example:
Packaged foods makers like
are faced with the unpleasant task if raising prices to
• Ethanol producers will likely be hard-pressed to sell into the
at a competitive price.
• Heavy equipment makers like
will see reduced demand for new equipment as farmers conserve cash.
• Cattle producers are culling their herds as they run out of feed,
setting the stage for a near-term glut that will (temporarily)
reduce beef prices.
Yet not all companies are suffering. I've come across a pair of
companies that actually stand to benefit from the drought. Each
firm focuses on a different
, and each is on the right side of the pricing trends. Here's a
1. Bunge (NYSE:
This company, which was founded 194 years ago, has its hands in
many areas of agriculture from commodities storage and trading to
sugar-based ethanol processing to the production of cooking oils.
Notably, 80% of its raw commodity exposure is outside the United
States. In places like Brazil, growing conditions are better so
has been fairly benign. This gives Bunge a crucial edge when
competing against U.S.-leveraged producers.
As an example, Bunge is the leading processor of soybeans in
South America. Analysts speak of "crush margins," which notes the
spread for finished soy products compared to input prices. For
Bunge, those margins are good, and likely to get even better.
Bunge is expected to deliver second-quarter results on Thursday,
July 24. Analysts had been throttling back their profit forecast
for the quarter, from $1.43 a share in April to $1.34 in June. But
few of those forecasts appear to reflect the impact of better
"crush margins" that appeared starting in early June. Analysts at
Citigroup have taken a fresh look at Bunge's likely second-quarter
profits, and see
earnings per share (
in the $1.55 to $1.60 range. These analysts also think Bunge will
top current third-quarterEPS forecasts of $2.19 by roughly 10%,
based on current trends.
Taking a longer view. Citi says Bunge's profits will keep
expanding on the heels of strong demand and solid margins,
to hit $8.40 by 2014 (which is roughly 5% above the consensus).
The analysts see Bunge's
rising to $95 from a recent $63 in July -- a 50% increase -- based
on a 12 times
of those 2014 profit forecasts. This logic may be too specific for
most investors. Instead, many are likely to simply take note that
the company is in the midst of a solid multi-year run of profit
growth, and shares, at roughly 80% of
, will likely change from a deep-value play into an
2. Ingredion (NYSE:
At first blush, this producer of corn sweeteners should be
suffering as much as its peers. After all, corn prices -- the
company's biggest expense -- are rising quickly. Yet Ingredion
(formerly known as Corn Products International) was wise enough to
lock in all of its 2012 corn needs at 2011 prices. Considering that
rivals will likely be compelled to raise prices, Ingredion has room
to maintain prices (boosting demand) or raise prices (boosting
margins). It's a nice problem to have.
But those gains are more likely to be seen in 2013, when
Ingredion's input prices remain hedged but selling prices are no
longer hedged (at least as of today).
Yet as is the case with many stocks, Ingredion has been on a
downward slide since the end of the first quarter, falling to a
recent $47 from $58. That comes at a time when earnings forecasts
have remained steady, thanks to those locked-in input prices.
Analysts at D.A. Davidson say Ingredion is poised for sustained
profit growth thanks to those industry pricing dynamics. They see
EPS rising from around $4.70 in 2011 to $5.25 this year and $5.80
in 2013. They say shares have 50% upside to their $70
. Ingredion will deliver second-quarter results on July 31, at
which time management is likely to focus on the coming gains that
accrue from fixed corn input costs.
Risks to Consider:
Though these farm stocks stand to fare better than their peers,
it may take several quarters for investors to fully trust that the
profit gains are sustainable.
Action to Take -->
Both of these stocksoffer a nice combination of value and growth.
Each trades for less than 10 times projected profits, yet each
appears poised for solid profit growth.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.