US-China Trade Talks to Influence Agriculture Operations Outlook

The Zacks Agriculture – Operations industry comprises companies that either produce or procure, transport, store, process and distribute agricultural commodities to consumers and ingredients to other parts of the agriculture industry (like the clothing, animal feed, energy, and industrial products industries). Some of these players also engage in dairy operations, land transformation activities and development of food ingredients using gene-editing technology.

The industry encompasses production activities related to traditional farming of crops (such as corn, soybeans, wheat and cotton), and livestock and poultry products (including meat, dairy and eggs). These products are mostly sold at grocery stores or exported overseas. Additionally, these products are used as feedstock for other industries. For example, cotton is used in the clothing industry and corn is used in the ethanol industry.

Here are the industry’s three major themes:

  • The industry is riding high on the benefits of the organic movement, wherein agriculturists are adapting to organic production techniques and curtailing the use of chemicals and pesticides. Further, innovations in food processing, improved grain handling techniques, larger storage spaces, diversification and strong emerging market demand are conducive to the industry. This shift to organic methods to satisfy consumers’ increasing demand for healthier food bodes well for agri-based product companies.
  • The agriculture industry is poised for steady growth through fiscal 2019 according to the USDA’s latest projections for agricultural exports. USDA estimates agricultural exports of $141.5 billion for fiscal 2019, which ends on Sep 30 (unchanged from the November 2018 forecast). Export volumes will benefit from improvements in livestock and dairy exports, offset by declines in grain and oilseed exports.
  • The U.S.-China trade war has done much damage to the growth of the U.S. agricultural segment in the recent past. Adversities arising from China’s retaliatory tariffs on American agricultural products, such as soybeans, corn, pork and poultry, have been a major concern for the U.S. farming segment. Among these, soybean was the most impacted as China is the largest importer. Nevertheless, positive developments from the ongoing talks to resolve the conflict, and China agreeing to make “substantial” purchases of U.S. agricultural products, should bolster the industry prospects eventually. Despite this, the USDA’s latest long-term projections report suggests that U.S. soybean exports are far from returning to pre-trade war levels until 2026-2027, mainly as Brazil and Argentina gain market share.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Agriculture – Operations industry, which is housed within the broader Zacks Consumer Staples sector, currently carries a Zacks Industry Rank #73. This rank places it at the top 29% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates solid near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential for the next year. In the past year, the industry’s earnings estimates for 2020 have increased by nearly 4%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags Shareholder Returns

The Zacks Agriculture – Operations industry has underperformed both the S&P 500 and its own sector in the past year.

The stocks in this industry have collectively declined 10.8% in contrast to the Zacks S&P 500 composite that improved 8.4%. On the other hand, the Zacks Consumer Staples sector has declined 4% over this period.

One-Year Price Performance

Agriculture – Operations Industry’s Valuation

On the basis of forward 12-month price-to-earnings (P/E) ratio, which is commonly used for valuing Consumer Staples stocks, the industry is currently trading at 12.16X compared with the S&P 500’s 17.14X and the sector’s 18.62X.

Over the last five years, the industry has traded as high as 16.01X, as low as 10.33X, and at the median of 13.91X, as the chart below shows.

Price-to-Earnings Ratio (Past 5 Years)

Bottom Line

The U.S. agriculture operations industry is catering to changing consumer preference, including growing demand for organic food products. However, the U.S.-China trade tensions have largely impacted the sales graphs of most players. Although initial U.S.-China trade negotiations bring in positive news for the industry, a conclusive deal on trade relations between the two countries will decide the fate of the U.S. agricultural operations industry.

While none of the stocks from the Zacks Agriculture – Operations universe currently hold a Zacks Rank #1 (Strong Buy), here we have mentioned one stock with a Zacks Rank #2 (Buy). Additionally, we suggest another three stocks with Zacks Rank #3 (Hold) from the same industry, which investors may hold on to. You can see the complete list of today’s Zacks #1 Rank stocks here.

Let’s have a look at them.

Calavo Growers, Inc. (CVGW): The consensus EPS estimate for this Santa Paula, CA-based company, which markets and distributes avocados and other perishable foods in the United States, has moved up nearly 1.6% for the current fiscal in the past 30 days. This Zacks Rank #2 stock has rallied 23% year to date.

Price and Consensus: CVGW

Amira Nature Foods Ltd (ANFI): The stock of this Dubai-based company has gained 73.7% in the past three months. The Zacks Consensus Estimate for current year has been stable in the last seven days. The company currently has a Zacks Rank #3.

Price and Consensus: ANFI

Calyxt, Inc. (CLXT): This Roseville, MN-based company carries a Zacks Rank #3 and has surged 59.2% year to date. The Zacks Consensus Estimate for the company’s current fiscal EPS has been stable for the last seven days.

Price and Consensus: CLXT

Limoneira Company (LMNR): The stock of this California-based company has gained 23.1% year to date. The consensus EPS estimate for the current year has been stable for the last seven days. The company currently has a Zacks Rank #3.

Price and Consensus: LMNR

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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