Fluctuating commodity prices and varying demand for new equipment and machinery add cyclicality to the agriculture industry. However, the industry also has a great deal of recession resistance. The agriculture industry may not make up a large percentage of the U.S. economy. But it is an essential industry people simply can't live without. A growing population can only be supported by increased food production, which provides a secular tailwind for long-term growth in farming.
Deere (DE -0.65%), Archer-Daniels-Midland (ADM -0.37%), and Corteva (CTVA -0.74%) each specialize in a different part of the agriculture industry. Deere through the design, manufacturing, distribution, and servicing of farm and heavy construction machinery. Archer-Daniels-Midland through the purchase, procurement, and storage of agriculture commodities, products, and ingredients. And Corteva through specialty chemicals designed for seed and crop protection. Together, this basket of agriculture stocks provides a diversified starting position if you're interested in the industry. Here's what makes each stock a great buy now.
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Deere is investing in the next era of agriculture
Daniel Foelber (Deere): Deere is the largest U.S.-based farm and heavy construction machinery or specialty industrial machinery company by market cap. And for good reason. Deere is the undisputed market leader in several key industries, including precision agriculture and small-scale agriculture. It also operates a sizable construction and forestry division.
Even after the recent sell-off, Deere stock has more than doubled over the last three years and is on track to produce record profits for full-year 2022. Deere's competitive advantages include its well-known brand and premium pricing, distribution network, vertical integration, and investments in technology. The company has been leading the push toward smart farming and automation in agriculture, which involves using software and artificial intelligence to drive efficiency, boost crop yield, and reduce costs.
In the below chart, you can see that Deere's operating margin, return on capital employed, trailing-12-month (TTM) research and development expense, and trailing-12-month net income are at or near five-year highs.
DE Operating Margin (TTM) data by YCharts
The metrics indicate that Deere is growing profit margins and profits, using its capital wisely, and making sizable long-term investments. Investors may look at Deere's 1.4% dividend yield and overlook the company. But what Deere lacks in yield, it more than makes up for with growth.
Deere has a lower dividend yield than other U.S.-based heavy and specialty industrial machinery manufacturing stocks -- such as Caterpillar, Cummins, and Illinois Tool Works. But it is far more specialized and could be a faster grower over the long term. In sum, Deere is an excellent choice for investors looking for exposure to the agriculture industry and who believe that the Industrial Internet of Things will play a growing role in established industries.
Position your portfolio for passive income growth with this noble agriculture stock
Scott Levine (Archer-Daniels-Midland): Finding stocks that can endure downturns in economic cycles is a great way to fortify your portfolio. But identifying recession-resistant stocks that also are reliable dividend payers? Now, that's a cash crop that can provide much-appreciated passive income during challenging market conditions. Fortunately, investors need not look much farther than Archer-Daniels-Midland and its forward-yielding dividend of 2%.
Archer-Daniels-Midland, a leading agriculture and human nutrition stock, has rewarded shareholders with a dividend for 90 years. That's no easy feat, considering the numerous recessions the country has endured during that time. Even more impressive, however, is that the company has maintained a streak of raising its dividend to shareholders, helping it to achieve the noble rank of Dividend Aristocrat. In fact, the company has 49 consecutive years of hiking its distribution to shareholders, making it one of the longest-tenured members of the distinguished group of dividend stocks.
Looking beyond the dividend, investors will find that the company's rock-solid balance sheet suggests it's well positioned to withstand a potentially tumultuous time in the economy. Archer-Daniels-Midland sports an investment-grade balance sheet as rated by Fitch Ratings, Moody's, and S&P Global. On a more granular level, investors will find evidence of the company's strong financial position in its conservative approach to leverage. Archer-Daniels-Midland, for example, ended the second quarter of 2022 with a ratio of net debt to earnings before interest, taxation, depreciation, and amortization (EBITDA) of 1.6. Furthermore, the company is well positioned to cover its current liabilities with a current ratio of 1.5.
For investors looking to sow their portfolio with the seeds of a stalwart agriculture stock, Archer-Daniels-Midland is an ideal choice, offering investors the opportunity to reap passive income while they wait out a possible recession.
This agriscience company is recession resistant
Lee Samaha (Corteva): It's not easy to find stocks that are up more than 22% in 2022 (not least because it implies a 45% outperformance over the S&P 500), but agriscience company Corteva is one of them. The reason for this is that the economy at large doesn't determine Corteva's end markets; they are driven by crop prices (high crop prices induce farmers to lay crops) and Corteva's ability to sell its seeds and crop protection products.
The good news is, despite a correction over the summer, the price of key crops like wheat, corn, and soybeans remains higher than it was at the start of the year.
On top of the revenue growth opportunity, Corteva has a margin expansion opportunity through implementing a much-anticipated restructuring plan focused on reducing exposure to less attractive end markets and simplifying its organizational structure. In addition, Corteva is expanding sales of its seed and crop protection systems under its patents. As a result, management plans to reduce the royalties it pays other companies to license their technology. One such product is Corteva's Enlist system, which is now planted on 45% of U.S. soybean acres after being on the market for only three years.
It's all expected to lead to its EBITDA margin rising from 17.4% in 2022 to between 21% and 23% in 2025. Ultimately, a combination of recession-resistant growth and margin expansion prospects makes Corteva an attractive stock in the current environment.
