The Zacks Agriculture - Products industry has been bearing the brunt of high input costs, labor shortage and supply-chain headwinds. The decline in commodity prices adds to the concerns. Nevertheless, increasing consumer awareness regarding food ingredients and the preference for healthier alternatives will support the industry. Alternative agricultural technologies like hydroponics and vertical farming are expected to be other key catalysts, given their inherent benefits.
Players like West Fraser Timber Co. WFG, CalMaine Foods CALM, GrowGeneration GRWG, Hydrofarm HYFM and Arcadia Biosciences RKDA are poised well to gain from the strong demand in their end markets and ongoing growth initiatives.
About the Industry
The Zacks Agriculture – Products industry comprises companies that are either involved in storing agricultural commodities, distributing ingredients to others, or engaged in farming crops, livestock and poultry products. Some are engaged in purchasing, storing, transporting, processing and selling agricultural commodities or products derived from the same. They operate grain elevators, wherein income is generated from commodities bought and sold using these elevators or held as inventory. Some companies provide nutrients, advanced indoor and greenhouse lighting, environmental control systems and accessories for hydroponic gardening — the method of growing plants using mineral nutrient solutions in a water solvent instead of soil. A few players offer innovative, plant-based health and wellness products. Companies producing lumber also fall under this industry.
Trends Shaping the Future of the Agriculture - Products Industry
Low Commodity Prices, High Costs Act as Woes: High interest rates and a strong dollar took a toll on agricultural commodity prices last year. Soybean, corn and wheat prices have dipped lately, as supply prospects from South America have improved due to favorable weather conditions in the backdrop of low demand. Demand in China for soybeans as animal feed is expected to go down due to the government’s efforts to reduce and substitute the use of soybeans in animal feed to decrease reliance on imports. The decline in crop prices, coupled with rising production costs, is expected to weigh on U.S. net farm income this year. The U.S. Department of Agriculture’s latest forecast for net farm income for 2024 is pegged at $116 billion, down from $156 billion in 2023. The forecast indicates an anticipated decline of 27% from the inflation-adjusted 2023 total, and would represent the largest annual decline since 2006. Players in the industry have also been facing rising labor, packaging and distribution costs, among other expenses. Companies are implementing cost-reduction actions and pricing strategies to sustain margins in the current scenario.
Solid Demand to Support Industry: Demand for food is directly influenced by population and demographic changes beside income growth and income distribution. Per the United Nations, the global population will rise to 8.5 billion in 2030 and 9.7 billion in 2050. This would lead to a 50% increase in global food demand. In response to the growing consumer demand for healthier food alternatives, several agricultural and food-based companies are investing in innovation and augmenting their product and market strategies to bring new quality and healthy food ingredients to the market. Ongoing improvements in grain-handling techniques and investment in larger storage spaces will likely support the industry. Plus, stable earnings across all cycles are ensured, considering the industry’s products are always in demand, irrespective of the condition of the economy.
Hydroponics & Cannabis Act as Key Catalysts: Hydroponics is gaining popularity as it gives growers the ability to regulate better, and control nutrient delivery, light, air, water, humidity, pests and temperature in an indoor setting. It can help produce crops faster with higher yields than traditional soil-based growers. It is being utilized in new and emerging industries, including the cultivation of cannabis and hemp. Vertical farms producing organic fruits and vegetables also utilize hydroponics due to a rising shortage of farmland and environmental vulnerabilities. Also, vertical farming is the latest agricultural technology, wherein companies use shelves and artificial light to grow produce, minimizing land and water consumption. Total sales for the hydroponic equipment industry are projected to surpass $16 billion by 2025. Even though the cannabis industry is undergoing a rough patch due to an oversupply, its long-term prospects are intact. In the United States, several states have legalized cannabis for medical or recreational use, representing the largest market in the world. By 2027, spending on legal cannabis is expected to reach $47.3 billion in North America.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Agriculture - Products industry is part of the broader Zacks Basic Materials sector. The industry currently carries a Zacks Industry Rank #220, which places it in the bottom 12% of the 251 Zacks industries.
The group’s Zacks Industry Rank, basically the average of the Zacks Rank of all the member stocks, indicates bleak prospects in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of the downward earnings per share outlook for the constituent companies in aggregate. Looking at the aggregate earnings per share estimate revisions, it appears that analysts are losing confidence of late in this group’s growth potential. Since the beginning of 2024, the industry’s earnings per share estimates for 2023 and 2024 have moved 28% and 36% south, respectively.
Before we present a few stocks worth considering for your portfolio, let us look at the industry’s recent stock market performance and valuation.
Industry Versus Broader Market
The Zacks Agriculture – Products industry has underperformed its sector and the Zacks S&P 500 composite over the past 12 months. Stocks in this industry have moved down 8.8% in the past 12 months compared with the S&P 500’s growth of 20.3%. The Basic Materials sector has declined 7.2% in the same timeframe.
One-Year Price Performance
Industry's Current Valuation
On the basis of the trailing 12-month EV/EBITDA ratio, a commonly used multiple for valuing Agriculture - Products stocks, we see that the industry is currently trading at 5.65X compared with the S&P 500’s 16.96X. The Basic Materials sector’s trailing 12-month EV/EBITDA is 15.22X. This is shown in the charts below.
Enterprise Value/EBITDA (EV/EBITDA) Ratio (TTM)
Enterprise Value/EBITDA (EV/EBITDA) Ratio (TTM)
Over the last five years, the industry has traded as high as 17.08X and as low as 3.63X, the median being 6.44X.
5 Agriculture - Products Stocks to Watch
West Fraser: The company has been witnessing solid demand for Oriented Strand Board (OSB), plywood and other engineered products in North America, driven by new home construction markets. WFG’s strategy of optimizing its portfolio through acquisitions, divestitures, mill curtailments and significant capital investments is expected to contribute to its growth. In line with this strategy, it recently finalized the acquisition of Spray Lake Sawmills in Cochrane, AB, aligning well with its lumber and treated wood business. West Fraser's emphasis on enhancing operational efficiency and reducing costs will aid margins. With strong financial flexibility and a favorable cost position, the company is well-positioned to maintain a competitive edge.
The Zacks Consensus Estimate for this Vancouver, Canada-based company’s earnings for 2024 suggests year-over-year growth of 1,067%. Earnings estimates have moved up 22% to $5.51 in the past 90 days. This diversified wood products company currently carries a Zacks Rank #3 (Hold).
Price & Consensus: WFG
CalMaine Foods: The company is committed to expanding operational capacity, pursuing synergistic acquisitions, and investing in innovative, scale-driven products and services to drive long-term growth. CALM completed the acquisition of the commercial shell egg production and processing facilities of Fassio Egg Farms, aligning with its strategy of expanding its cage-free egg production capacity. The preference for specialty eggs, including cage-free eggs, continues to be on the rise due to state mandates, as well as consumer preference. Also, consumers are willing to pay premium prices for these products. Specialty eggs, thus, remain a focal point for CalMaine Foods’ growth strategy. Backed by its efforts, the company’s sales of cage-free eggs have increased and now constitute a larger share of its product mix. CalMaine Foods also recently announced that it agreed to acquire a broiler processing plant, hatchery and feed mill in Dexter, MO, from Tyson Foods. It plans to repurpose the assets for use in the production of eggs and egg products. This deal will help CalMaine Foods expand its geographic footprint in Missouri and the surrounding markets.
Jackson, MS-based CalMaine Foods is the largest producer and distributor of fresh shell eggs in the United States. The Zacks Consensus Estimate for CALM’s earnings for fiscal 2024 has moved up 61% in the past 90 days. The company has a trailing four-quarter earnings surprise of 131.5%, on average. CALM carries a Zacks Rank #3.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price & Consensus: CALM
GrowGeneration: The company has been focusing on building and growing its private brands, investing in accretive and complementary acquisitions, and expanding its store presence. Its acquisition strategy is focused on acquiring well-established, profitable hydroponic garden centers and proprietary brands, and private-label brands. GRWG has been right-sizing its cost structure, lowering inventory and consolidating its store footprint. It expects 2023 margins to benefit from these actions. The favorable mix impacts of a greater proportion of private label and proprietary brand sales are also expected to favor the results. The company has also been continuing its progress on digital transformation efforts to enable further efficiencies in its supply chain. Greenwood Village, CO-based GrowGeneration owns and operates retail hydroponic and organic gardening stores in the United States. The Zacks Consensus Estimate for the company’s fiscal 2024 earnings indicates year-over-year growth of 22.3%. Earnings estimates have been unchanged over the past 90 days. GRWG currently carries a Zacks Rank #3.
Price: GRWG
Hydrofarm: The company is focused on streamlining operations, reducing costs and improving efficiencies amid the challenging operating environment. Major initiatives include narrowing the product and brand portfolio, relocating and consolidating certain manufacturing and distribution centers, and the closure of two company locations. These efforts are expected to drive margins by improving the brand sales mix and productivity, and reducing costs. The company has also been expanding its reach to serve commercial cannabis, and commercial food and floral end users.
Shoemakersville, PA-based Hydrofarm engages in the manufacturing and distribution of controlled environment agriculture equipment, and supplies in the United States and Canada. The Zacks Consensus Estimate for HYFM’s earnings for fiscal 2024 indicates year-over-year growth of 51%. The estimate has been unchanged over the past 90 days. HYFM currently carries a Zacks Rank #3.
Price: HYFM
Arcadia Biosciences: The company continues to make solid progress in executing Project Greenfield, its three-year strategic plan to drive growth and profitability. RKDA has been streamlining its business to focus on higher-margin brands, while aggressively managing costs. Aided by its efforts, the company has delivered positive gross profit from continuing operations for seven consecutive quarters and reported the lowest total SG&A expenses in four years in the third quarter of 2023. The GoodWheat range has been supporting revenue growth for the company. RKDA entered the baking mix category with the launch of better-for-you pancake and waffle mixes in mid-2023. GoodWheat pasta and pancake mixes, and Zola coconut water were added to more than a thousand stores of distribution in the third quarter. The company has now expanded to a third category with GoodWheat Mac & Cheese, a family household staple representing more than $1.1 billion in sales. Better-for-you brands make up nearly 20% of the category and are growing faster than traditional brands. RKDA plans to ramp up innovation for GoodWheat and Zola coconut water, and add categories through acquisition.
Arcadia is a producer and marketer of innovative, plant-based health and wellness products. In the past 90 days, the Zacks Consensus Estimate for this Davis, CA-based player’s fiscal 2024 earnings has moved up 25.5%. Earnings estimates indicate year-over-year growth of 59%. RKDA has a trailing four-quarter earnings surprise of 39%, on average. It currently carries a Zacks Rank #3.
Price & Consensus: RKDA
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