Pat McKeough responds to many requests from members of his Inner Circle for specific advice on buying stocks as well as questions on investment strategy and the economy. Every week, his comments and recommendations on the most intriguing questions of the past week go out to all Inner Circle members. And each week, we offer you one of the highlights from these Q&A sessions. While we reserve our buy-hold-sell advice for Inner Circle members, these excerpts provide a great deal of information and analysis on stocks we’ve covered for members of Pat’s Inner Circle.
This week we received a question from an Inner Circle member about one of Canada’s agricultural stocks. AgGrowth specializes in grain handling and other agricultural equipment and does the bulk of its business outside of the country, in the U.S. and the former Soviet Union. Pat looks at AgGrowth’s strategy of growing by acquisition and examines how today’s sophisticated farming methods impact the company’s growth prospects.
Q: Pat: Could you give me your recommendation on Ag Growth International? Thank you.
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.
Ag Growth sells its products through dealers and distributors in 48 states and nine provinces, as well as overseas, including Russia, Ukraine and Kazakhstan. Ag Growth gets about 53% of its sales from the U.S., followed by Canada (24%) and international markets (23%).
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 subsidiaries include Batco (which makes crop conveyor belts), Wheatheart Manufacturing (grain-handling equipment), Westfield Industries (portable augers to transfer grain), the Edwards Group (aeration and grain-drying equipment), Twister (grain bins) and Mepu Oy (grain-drying systems).
Latest acquisition adds $11 million to company’s sales
In the three months ended March 31, 2013, Ag Growth’s sales fell 17.7%, to $59.5 million from $72.4 million a year earlier. That’s mainly due to lower U.S. demand for grain-handling and other equipment in the wake of last year’s drought.
The company recently sold its plant in Saskatoon, Saskatchewan, for a $4.7-million gain. That offset a $1.1-million foreign exchange loss. Even with this net gain, Ag Growth’s earnings fell 35.9%, to $3.4 million from $5.3 million. Earnings per share declined 38.1%, to $0.26 from $0.42, on more shares outstanding.
On March 31, 2013, Ag Growth’s long-term debt was $145.9 million, or a manageable 31% of its market cap.
The company has a history of growing by acquisition. It mainly buys smaller firms. For example, in October 2011 Ag Growth paid $11.5 million for Nebraska-based Airlanco. This firm makes fans, dust-collection systems and filtration equipment for companies that handle and process grain. Airlanco has added roughly $11 million to Ag Growth’s annual sales.
The stock trades at 18.4 times the company’s forecast 2013 earnings of $1.98 a share. It pays a monthly $0.20 dividend, which yields 6.6% on an annualized basis.
In the Inner Circle Q&A, Pat considers the risk of a stock that depends on year-to-year crop conditions and harvest yields. He also examines the added risk of AgGrowth’s ambitious growth-by-acquisition strategy. He concludes with his clear buy-hold-sell advice on the stock.
COMMENTS PLEASE—Share your investment experience and opinions with fellow TSINetwork.ca members
Do you believe that agricultural stocks have a high growth ceiling as standards of living improve around the world and demand for better food rises? Or do you think they are still too vulnerable to the age-old problems of weather and crop failures to be good investments? Have you had any big gains with agricultural stocks? Let us know what you think.
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