Please ensure Javascript is enabled for purposes of website accessibility

Nothing Seedy About UAP

By Stephen D. Simpson, Simpson, – Updated Nov 16, 2016 at 12:28PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Although agriculture is not really a growth industry, this well-run supplier is generating solid returns on capital.

Say it with me, brothers and sisters -- boring can be beautiful. Give me a well-run business that puts the attention-deficit-disordered day-trading community to sleep, and you might have a winner on your hands. Of course, boring doesn't guarantee anything. Sometimes boring is just . well, boring. So what, then, are we to make of UAP Holding (NASDAQ:UAPH), the largest independent distributor of agricultural inputs -- chemicals, seeds, fertilizer -- in North America?

(Snore .)

C'mon, wake up! I know it's Friday, but this could be interesting.

To start off, second-quarter performance looks like a mixed bag. Although the company beat top-line expectations, the earnings-per-share number came up 12% short of the average. As you might imagine from that, margins were soft. The company blamed some of the trouble on the impact of generic pesticides and other forms of crop protection in the chemicals business. Yes, just as in the pharmaceutical trade, generic pesticides, herbicides, and fungicides can hurt the profits of those who sell the branded version of the chemicals in this industry.

The company also reported that fertilizer sales were mixed, with higher prices being somewhat offset by lower usage. As we know from following the likes of Mosaic (NYSE:MOS) and Potash (NYSE:POT), fertilizer prices are very high right now, and some farmers are responding by waiting in the hope that prices will decline.

Although this wasn't the greatest quarter for UAP, I think the company could still be worth a little due diligence. This company serves an important purpose distributing chemicals and seeds from suppliers like BASF, Monsanto (NYSE:MON), DuPont (NYSE:DD), Syngenta (NYSE:SYT), ConAgra (NYSE:CAG), and Bayer to the tens of thousands of farmers and cooperatives that use them. As in other distribution sectors, there are advantages to size, and UAP can not only strike better bargains with suppliers than its smaller competitors but also look to act as a consolidating force in the industry.

Three details in particular make this story interesting to me. (I told you it could be interesting.) First, the company is on a mission to improve its operations. It was once part of ConAgra, which didn't run it very well. Current management still has room to improve -- particularly in working capital usage. Second, the company has a growing and higher-margin proprietary business that could help improve profitability. Third, the company generates a very good return on its capital base, and that's generally a reliable indicator of good management.

I can't in good conscience call UAP a slam-dunk winner at this point. But I do believe there is room for the company to grow faster than its industry, improve its cash-flow generation, and continue to generate good returns on capital and a nice dividend. In other words, I think it's at least worth watching a bit longer.

For more from the fields:

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

None

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Nutrien Stock Quote
Nutrien
POT
E. I. du Pont de Nemours and Company Stock Quote
E. I. du Pont de Nemours and Company
DD
Conagra Brands, Inc. Stock Quote
Conagra Brands, Inc.
CAG
$34.35 (-1.18%) $0.41
The Mosaic Company Stock Quote
The Mosaic Company
MOS
$48.53 (-7.60%) $-3.99
Monsanto Company Stock Quote
Monsanto Company
MON

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.