Replying to a question from a Member of his Inner Circle, Pat McKeough looks at Ag Growth, a leading maker of grain storage and handling equipment. Ag Growth recently completed a big acquisition that has added revenue. However, demand for the company’s products fell this year after a record crop in North America in 2014. As a result, its earnings fell by a third. Pat looks at Ag Growth’s longer-term growth potential and whether demand for its equipment is likely to rebound. He also examines its high yield, as well as its high debt levels.
Q: Hello, Pat. I am holding Ag Growth in my TFSA. Should I buy more, wait or dump it and buy something new? Thank you very much.
A: Ag Growth International Inc., (symbol AFN on Toronto; www.aggrowth.com), is a leading maker of portable and stationary grain-handling, storage and conditioning equipment. The company is based in Winnipeg.
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Ag Growth sells its products through dealers and distributors in Canada and the U.S., as well as overseas, including Russia, Ukraine and Kazakhstan. It gets 44% of its sales from the U.S., followed by Canada (34%) and international markets (22%).
The company started out as an income trust. It first sold units to the public at $10 each and began trading on Toronto in May 2004. In June 2009, it converted to a corporation and changed its name from Ag Growth Income Fund to Ag Growth International.
Ag Growth’s main brands include Batco (crop conveyor belts), Wheatheart Manufacturing (grain-handling equipment), Westfield Industries (portable augers to transfer grain), Grain Guard and Keho (aeration and grain-drying equipment), Twister (grain bins) and Mepu (grain-drying systems).
The company has a history of growing by acquisition, which adds risk. Its latest was Winnipeg-based Westeel for $221.5 million in May 2015. This firm makes a variety of grain-storage equipment. It also has operations in Europe.
If you exclude costs to integrate this business, Ag Growth’s earnings fell 33.9% in the three months ended September 30, 2015, to $8.9 million from $14.9 million a year earlier. The company sold shares to help pay for Westeel. As a result, earnings per share fell at a faster pace of 49.6%, to $0.56 from $1.11.
North American crop production fell following a record harvest in 2014, hurting demand for the company’s grain-handling equipment. This was the main reason for the lower earnings. Revenue gained 9.3%, to $125.6 million from $114.9 million, thanks to Westeel.
As of September 30, 2015, Ag Growth’s long-term debt was $356.8 million, or a high 85% of its market cap. It also held cash of $33.3 million.
The company’s business depends on crop conditions and harvest yields, which vary from year to year based on rainfall and other factors. However, today’s farms tend to have higher acreage and higher crop yields per acre. That’s because they manage their land better, and seed technology has improved. This expands Ag Growth’s market.
As well, as farms get larger and more sophisticated, farmers are storing more of their crops on their properties. This helps Ag Growth benefit from its well-established position as a niche supplier of grain-handling equipment.
The stock has dropped 50% in the past year and trades at 14.2 times the company’s forecast 2015 earnings of $2.05 a share.
The company pays a monthly $0.20 dividend, which yields 8.3% on an annualized basis. That payout seems safe for now. If you include shareholders who opt to receive their dividends in the form of new shares instead of cash, dividends ate up 60% of its cash flow in the first nine months of 2015.
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