A pessimist would say that trouble is brewing in each of the world's major breadbaskets. North American farmers in the Midwest are suffering being too efficient at producing food, while America's once-robust citrus crops are being wiped off the planet by pests. South American farmers are in turmoil caused by droughts, floods, and poor policy decisions. Meanwhile, the fertile plantations of the Mediterranean are being sapped by pesky flies, and the agrarian economies of Eastern Europe are being threatened by a growing list of geopolitical risks.
An optimist would say that despite the gloomy state of global agriculture, there's still opportunity for investors who know where to look. Several businesses have risen above -- and even exploited -- market uncertainty to deliver consistent progress and value in recent years. Here's why opportunistic investors may want to take a closer look at FMC Corp. (NYSE:FMC), Calavo Growers (NASDAQ:CVGW), and Nutrien (NYSE:NTR) in 2019.
Going all in on agricultural solutions
Check out the latest FMC earnings call transcript.
FMC Corp. is oh-so-close to completing a simplification strategy that's been 23 months in the making. It originated when the company acquired certain agricultural-sciences assets from DuPont, which became fully integrated in the first quarter of 2018. When the business completes the spin-off of shares in the newly publicly traded lithium company Livent Corporation (formerly FMC Lithium) on March 1, management will be able to focus 100% of its bandwidth on the agricultural solutions segment. That will mark a sharp departure from the operating structure just two years ago, when the company wielded three unique business segments.
What will management do with its newfound focus? Well, if 2018 is any guide, then shareholders can expect good things ahead. When third-quarter 2018 operating results were announced late last year, the business was on pace to hit the midpoints of full-year 2018 revenue and EBITDA guidance calling for $4.2 billion and $1.2 billion, respectively. Both represent double-digit improvements from the prior-year performance. More importantly, revenue is split nearly equally between four global regions (demonstrating diversification), although the company's world-leading insecticides portfolio accounts for 57% of earnings (demonstrating market leadership).
Once FMC Corp. slims down for good, management expects to continue developing a robust pipeline of novel products (including in the red-hot biologicals vertical), shift its product mix to focus more on higher-value crops such as fruits, and return freed-up cash to shareholders. The company expects to deliver $1.3 billion in dividends and up to $3.2 billion in share repurchases in the next five years -- and that's on top of $1.8 billion in spending on research and development. Considering shares have walloped the total return (stock performance plus dividends) of the S&P 500 in the last three years, with a performance of 102% versus just 34% for the index, the simplification of the business is likely to keep that trend humming along.
A historically expensive stock just got a lot cheaper
Calavo Growers is a leading producer of avocados and has invested heavily to expand its presence in value-added fresh food, such as ready-to-eat guacamole. Shares were absolutely crushing the S&P 500 not long ago, but a tumble in December makes the comparison a little more pedestrian now: The avocado expert has delivered a three-year total return of 53%, compared to 34% for the index.
So what triggered that late-2018 tumble? The business reported relatively weak fiscal fourth-quarter 2018 results after facing headwinds in each of its three segments, due to recalls (including one from a supplier) and sliding selling prices of avocados. Calavo Growers also recorded a $12 million noncash loss from its investment in meal-kit provider FreshRealm, and stated in its annual filing with the Securities and Exchange Commission that it expects to record additional losses for the unconsolidated entity in fiscal 2019. Nonetheless, the avocado leader remains committed to the long-term potential of the start-up.
For a business that has delivered nothing but growth in recent years, the fiscal 2018 performance -- which included year-over-year declines in gross profit, earnings per share, and operating cash flow -- was a bit of a shock. But it will likely be remembered as just a blip on the radar as time goes on. Calavo Growers CEO Lee Cole said the business has started strong in the fiscal first quarter of 2019, and should "deliver record revenue and double-digit growth in adjusted earnings per share" for the year.
While management will need to improve its response to external headwinds, the long-term growth of the avocado and prepared-foods markets remains intact. Considering shares are now trading at the lowest future earnings ratio in the last five years, and the lowest price-to-book value in two years, long-term investors may want to give this agriculture stock a closer look.
A good bet on a fertilizer market recovery
Check out the latest Nutrien earnings call transcript.
The persistent headwinds in agricultural markets couldn't have come at a worse time for fertilizer producers. A few years ago global nutrient markets fell grossly out of balance, which is exactly what happens when a handful of companies control the industry and irresponsibly increase production volumes. Potash Corp. and Agrium responded by merging into one behemoth company called Nutrien, which is ready to hit the ground running in 2019 following a rocky market debut last year.
The world's largest fertilizer producer expects to achieve nearly $600 million in annual cost savings by the end of the year. When coupled with $5 billion in net proceeds from asset sales completed in late 2018, Nutrien is well-positioned to put its newfound financial flexibility to good use by paying down debt and investing in growth. It will also repurchase the equivalent of 8% of outstanding shares. If management executes, this could be a ripe opportunity for long-term investors.
Nutrien expected to begin the new year with around $6 billion in net debt (total debt less cash on its balance sheet), compared to over $11 billion at the end of September 2018. That would lower its net debt-to-EBITDA ratio to below 2 -- an important milestone given the historical struggle with leverage. While it would be great to see the company actually pay down its debt balance, the business is confident that its market position can yield stellar improvements. A mere $25-per-metric-ton increase in selling prices would provide an additional $650 million in annual EBITDA, according to Nutrien.
That potential for upside from fertilizers, coupled with intelligent investments in retail and digital agriculture platforms, hints that Nutrien could grow into a much more resilient business. Long-term investors would very much appreciate the ability to weather future market downturns and down cycles, and this stock might become the best-positioned in the fertilizer industry over the course of 2019. That said, it does require a bit more babysitting until management proves it can deliver.
These agriculture stocks could be long-term winners
Agriculture markets might have started 2019 in a funk, but the situation could improve by year's end thanks to innovative new tools, lower trade friction, and sharply increasing demand for renewable fuels. Whether or not the long-awaited recovery roars to life this year, investors can find solid opportunities with FMC Corp., Calavo Growers, and Nutrien -- especially considering the first two have a history of beating the total return of the S&P 500. (Nutrien is too young to make a meaningful comparison.)
One notable blemish for these agriculture stocks is their appetite for share repurchases, which are perhaps the lousiest use of capital in all of capitalism. In the long term, businesses would be better served by pouring more money into R&D activities or eliminating debt -- and there's no shortage of either in these commodity-based markets. Unfortunately, corporations can't seem to buy back enough shares these days, so individual investors will have to hope these stocks can keep outpacing the gains of the S&P 500 in the long run, despite the lazy deployment of capital today.