What to Reap at UAP?

Kermit had it right: It's not easy being green. There are numerous plays on the agricultural sector, and they all have their own unique characteristics, but it's hard to say that companies such as Bunge (NYSE: BG  ) or Syngenta (NYSE: SYT  ) have really been lighting it up of late. And with investors reacting rather sharply to lowered guidance from agricultural products distributor UAP Holding (Nasdaq: UAPH  ) , you can add another to the list.

As it was, it was a tough quarter for UAP. Sales were up about 3%, as reported, but would have been nearly flat were it not for the benefit of an acquisition. Seed revenue was quite strong -- up 16% on good volume and pricing -- but chemical and fertilizer revenues were both down about 1%, as reported.

Making matters worse, UAP is seeing some troubles on the margin lines. Reported gross margin improved from last year, but that's a mirage. Results were boosted by the timing of vendor rebates, and the adjusted gross margin actually fell more than half a point from the year-ago level. So too on the operating line: Reported results look all right, and the company did hold the line on growth in selling, general, and administrative expenses, but actual operating results were down when you adjust for the impact of those rebates.

If I'm reading the corn and soybean leaves correctly, margins look to be a sticky problem for the near future. Generic crop chemicals are hurting the company's margins, and so too is the price-based competition between major seed companies (such as Monsanto (NYSE: MON  ) , Syngenta, et al.) As a distributor, that leaves UAP in a tricky spot: It's the biggest independent distributor out there, but that doesn't mean so much if gains in the company's proprietary business(es) are being eaten away by a shift toward sales of lower-margin products.

UAP has produced pretty respectable returns in its short life as an independent (it was once part of ConAgra (NYSE: CAG  ) ). Given that it's the No. 1 player in an essential but overlooked industry (distributing seeds and chemicals to farmers), that gets my attention -- as does a good dividend. I'm going to have to delve deeper into this one before ponying up my own money, but now may be a time for adventurous Fools to take a closer look.

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).

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