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Strategies & Market Trends : Value Investing
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To: Lazarus who wrote (60580)3/21/2018 7:12:13 PM
From: E_K_S3 Recommendations

Recommended By
Lance Bredvold
Lazarus
Spekulatius

  Read Replies (1) of 78774
 
Re: GIS and the Ag basket

I like the company but it has legacy products that now have shrinking margins (mainly their cereals). They also said today they see transportation costs increasing (same as DF & BGS). These costs are industry wide.

BGS is revamping their product portfolio to include organic foods. GIS bought a high end dog food company but it is tiny compared to their market cap. The BGS acquisition is pretty large as a % of their market cap.

I want to Buy ADM to add to my AG basket but it is still expensive at 17.7 PE and 3% dividend. These Ag/food companies tend to move in big cycles (usually 10 year) and can sell down to BV on the sell off. ADM BV is $32.76/share and that is the range I am going to Buy (at/below $35/share). This would also put their dividend in the 4% area.

From my value observation, the earnings growth first starts to crack. When you see 3-5 year negative growth (but still solid earnings; notice the PE falls), this to me is the first indication that company/sector has lost pricing power (and/or is facing increased expenses).

Pricing power is impacted by commodity prices and by the company product portfolio. Management can change their product portfolio but has little control over pricing. DF, is impacted by milk prices and that is controlled by the dairy farmers and heard size. Last I checked too much milk is produced even as herd size growth has stalled. Eventually the herd size will be cut 10%-15% (similar to what was done in prior years) and milk production will fall and prices will rise.

Therefore, my thesis is we are in a cyclical food commodity oversupply cycle (huge corn & soybean production last two years) resulting in depressed prices. Margins have fallen w/ the processors and are moving more product resulting in higher transportation expenses.

I expect many of the AG/food companies to sell down to BV, report negative earnings growth (due to lower margins) until eventually supplies are reduced. The value proposition is to buy these companies at/near BV (or when their div yields 4% or higher), wait for excess supplies to diminish and watch for better long term pricing power.

It's a 2-3 year transition period. Some can/may make the change faster w/ new product portfolio acquisitions, other just have to wait for prices to increase. My goal is to build my AG basket of companies over the next 24-36 months, picking off those companies that are caught in this negative earnings growth cycle.

EKS
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