Agricultural sector insights at Agco's Investor Day

Back in October when I last wrote up my thoughts on the agricultural machinery and related company Agco I noted:

'I found the tone of the Q3 update slightly better than expected and it resulted in a tweak up in EPS hopes (US$3.20 versus US$3.10!) and a maintenance of the free cash flow expectations (a handy 7% free cash flow yield at the prevailing share price) even if sales and capex were both cut back: 

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Given agricultural markets have remained difficult how has the company got on in the interim and how it is seeing 2016?  On the former expectations remain unchanged and the strength of the structural agricultural theme is still very apparent as noted by the estimated growth in protein demand over the next few decades.

However 2016 preliminary hopes show discernibly lower adjusted EPS and cash flow than anticipated in 2015.

Well that's not great...and hence no wonder the stock is down today (and once again failing to pierce decisively the mid US$50s):

No surprises for the reason for this guidance dullness: weaker demand

 

And so production levels are down.  Note that this is true across the full year with even anticipated Q416 fade. I note on another slide however that they are keeping pricing up with positive shift in this metric of +2% anticipated in FY16e.  A small positive to take from a not great statistical backdrop.  

The rest of the presentations were taken up with what I would regard as usual observations including grain storage opportunities, standardisation benefits, new product launches...

...and the growth of the parts division (and other service initiatives).  All completely sensible and expected.  

With free cash flow falling to a c. 4% yield and the EV/ebit multiple even with the lower share price mechanically rising to a low teens level, Agco is back to being a forward value hope investment.  For me the theme remains good and there is technical support in the lower US$40s but again investors are having to hope for the tailwind of higher crop prices and the like. I will remain an investor - and maybe even augment in the lower US$40s - but I can understand why some people will be sceptical. 

John Deere: an agri sector behemoth reports

It has not been the easiest last few months for John Deere.  As I noted in my last write-up (link here) a combination of low crop prices and hence variable demand for agricultural machinery hit the company's profitability and pushed the shares down in August.  Whilst little has changed - and the perception towards both commodities and emerging markets has probably worsened since over the last three months - the stock is moving sideways. 

The company's year-on-year Q4 numbers remained shabby at face value...

 ...but underlying themes were not dis-similar than before with good pricing and control of costs and more exogenous factors impacting:

This is anticipated to continue into Deere's fiscal 2016 as the industry outlook remains flat to negative at a sales level across all geographies.  Nevertheless pricing is still anticipated to remain positive and the company was at pains to note that these were industry-wide estimates.  

Nevertheless there are some positives with the company noting on the conference call: 

'demand/supply balance even more compelling than a year ago despite a year of strong production'

inventories - 'much more favourable position than the competition' 

‘long-term fundamentals for the agricultural business in Brazil remain solid’

‘all-time record high for John Deere Financial’

‘leasing is becoming more popular for many of our customers’ 

And then there is valuation.  With a now 3%+ dividend yield and free cash flow of US$2.7bn being all applied to a share buyback (so equivalent to c. 10% of market cap) returns to investors are reasonable.  Cash flow generation will be less in FY16e as per the forecast below but at a historic FY15A x8 market cap:ebit multiple the metrics are not extended.  

Even though there was no mention of the longer-term thematic drivers (ex the quote above) Deere remains in a good place to benefit from such factors.  Trading is still not easy but I still see value - as I do with sector peer Agco (see my most recent write-up of this name here). I remain long both names and pleased to see positive reactions to clearly still mixed numbers reflecting the low sentiment towards the space currently.  

Impressive quarter and guidance from Tyson Foods...not that I still own the stock!

Tyson Foods is an impressive performer today with the share up 9% or so.  Longer-term readers may recall that the company was on my 'stocks for 2014' list and I made a great turn in it from later 2013 to early 2015, exiting a little over the US$40 level.

Until today the stock had broadly tracked sideways as shown below...

...but today's break to just under the US$48 share price level at the time of writing reflects something different.  In short Tyson's always strong cross-category position...

...has been augmented via the Hillshire purchase around fifteen months ago into a company with a far stronger prepared foods position (an area which only the currently superlative chicken business currently generates a higher operating margin in).  

After making well over US$10 when I sold in the early US$40s I admit I was rather sceptical of the Hillshire push. Not so much the general strategy - the generally steadier nature of prepared foods makes it an ideal area to expand into - but rather the price paid and the resulting multiple expansion. 

Well more fool me - to a degree.  Today's guidance for FY16 suggests a capability to push above US$2.5bn in operating profitability at around a US$1.6bn free cash generation level - cash being used to continue buying back shares as well as pay the current 1% dividend yield (and also continue reducing debt with a target to push this below x2 ND:ebitda sooner rather than later).  

So even with today's share price romp the shares are trading on less than x11 EV/ebit FY16e and a pleasant higher single digit free cash yield - hardly a disaster at all.  And looking at the above it is clear that some parts of the business - the Beef division clearly - could have gone a lot better.  

The trouble is that's the meat processing and retailing business.  Even in a generally highly confident conference call there were plenty of mentions of at-the-margin events.  Even Tyson's leading position in most of its areas of operation cannot save it from some of these inevitable agricultural markets challenges.  

And that's why I prefer to pay a lower multiple i.e. single digit EV/ebit.  Impressive numbers but on a risk-reward basis I am noting down that c. US$43 level for a x9s prospective EV/ebit entry point and sub US$40 for something below x9.  

Of course I could have held it all the way through - but the big Hillshire acquisition worried me at the time.  I am glad for the company that it appears to have worked through strongly.  Big deals don't always.  

Some Thursday reporters: Adecco, Agrium, Celgene

Having already appraised Randgold Resources (link here) and Apache (link here) time to take a look at a few other companies that reported today (Thursday). 

Adecco - the Swiss listed recruitment company - induced me to comment on Twitter earlier: 

'2015 EBITA margin..strong at c. 5.2%..below target of >5.5%..organic revenue growth is steady but not accelerating'

You can see this deterioration in the chart below: 

I last wrote on Adecco here when I observed that a sub CHF70 share price offered trading opportunities (which last time I took).  And with the share below this level now...

...I am starting to think along similar lines. Around a x10 EV/ebita multiple and a 3%+ yield plus an emerging market opportunity it feels opportunistic to me...

 Talking about opportunities I have been quite vocal about commodity-centric opportunities and even noted that stocks like Mosaic (link here) are starting to outperform after big falls. Another sector peer Agrium reported today...and their shares have also started to recover.

Their presentation document was worthy of a look with this chart of particular note.  Some fundamental support for the potash and related markets?

Finally, Celegene:

Celgene at c$120 level so many times over last year. Ok nos but valuation needs more

The troubles is a x20s EV/ebit valuation always requires more. In the space I still prefer Gilead (link here).  

Today's US earnings wrap: Gilead, Agco, Mondelez, Hershey

Far too many numbers out to easily keep abreast of...but here are a few names which caught my attention.

Gilead is a stock I have written at length about before (link here) and last time established a top of the range US$125 price target.  Biotechnology can be a divisive area and certainly there have been significant bouts of rotation against the space over the last few months.  Nevertheless Gilead shares have remained relatively resilient:

Tuesday's after hours results continued the solid story progress...although unlike in previous quarters the only guidance edging up occurred at the net product sales line: 

No doubt this disappointed some investors but the investment story outlined above remains very much on-track be it for the HCV (below) or the HIV franchise:

Gilead only guided for full-year product revenues of US$30.5bn which would imply Q4 revenues of only US$6.8bn which does not appear realistic given the US$8bn+ of revenues in Q3.  Low-balling?  Quite possibly.  

The c. US$90-125 range still works for me even if the company was pretty coy about wider corporate initiatives (raising of monies via bond issuance etc.)  At the upper end of this range that is still equivalent to only a low teens prospective EV/ebit level.  

Turning to today inevitably I reviewed events at my old friend Agco (last written up here).  I found the tone of the Q3 update slightly better than expected and it resulted in a tweak up in EPS hopes (US$3.20 versus US$3.10!) and a maintenance of the free cash flow expectations (a handy 7% free cash flow yield at the prevailing share price) even if sales and capex were both cut back: 

Yes, conditions remain tough especially in South America but inventory management is apparently solid ('better than the industry average') and pricing is still positive (a trait noted by Deere too).  Clearly still not the easiest conditions but the stock is pushing in the right direction - and with a 1% dividend yield, ongoing share buyback and net debt around x1 ebitda this should continue.  

I am still only looking to review my holding in the stock c. 10% higher than prevailing when the company starts to trade more clearly in the double digit EV/ebit valuation space.  

Finally Mondelez which I described last month as having 'warmed up to' as 2015 progressed.  No surprises to regular readers that their continuing excellent pricing power was an influence here:

The above focus actually took the edge off their revenue/market share performance (with the exception of gum/candy - more of that later) but in a choice between price and volume nine times out of ten I will choose price, so I am not too worried about this. 

Otherwise - fearful of potential activist pressure no doubt - shareholder remuneration (mostly buyback but also including a 1.4% dividend) is currently running nicely over a 5% free cash flow yield and margin enhancement targets for 2016 were reiterated.  Blighted by FX negatives the shares are not classically cheap (EV/ebit >x20s) but that is why as noted last month you get aggressive at the c. US$40 share price mark.  Thematically the company are in the right products (premium/pricing power) with a very international sales base. 

A final company: Hershey.  I wrote up a couple of extensive pieces on the stock earlier in the year (link here) concluding that a sub US$85 was ideal to buy the stock.  We did not get there during the early Autumn (despite sometimes being close) but it appears that currently we may be building into another opportunity: 

So what did they say?  Well essentially earnings are to be at the low end of the +3-5% hopes as:

'U.S. net sales were below expectations due to lower than expected candy, mint and gum (CMG) retail takeaway in the third quarter. This softness also impacted broader mainstream snacks, where consumption trends during the quarter were less than the June year-to-date increase. It appears that CMG and broader snacks marketplace performance in the quarter was pressured by lower consumer trips and a decline of in-store merchandising and programming at some retailers'.

Funny how Mondelez above did better in their gum and candy division...clearly they took share. 

China was also not firing on all cylinders for the company but innovation, new launches and a hugely important seasonal period is just about to get underway and - as with Mondelez - at least Hershey is not trading off on price:

'Price realization, primarily in the U.S., was a 5.8 point benefit. Volume was off 4.3 points due primarily to elasticity related to the previously announced price increase and lower sales in China'.

Around the US$85 level remains an ideal entry level for me.  One to keep a particularly close eye on. 

Earnings catch-up: Europe (Whitbread, Syngenta, ABB)

So many numbers out over the last couple of days...it has been hard to keep up especially as I have been putting the finishing touches to a couple of presentations.  A few thoughts however first on European stocks and then American ones.

Whitbread numbers were pretty solid.  Unfortunately the shares in the Premier Inns and Costa Coffee operator never fell to levels that were compelling enough for me as detailed in my extensive write-ups back in 2013 (link here).

As written up outside of Financial Orbit published output I became very cautious in the £50s zone but what to think here in the upper £40s following a reiteration of their core medium-term targets?

Clearly this is still a company (albeit soon under a new CEO) which is firing on all cylinders.  One quick slide on the core Premier Inns... 

...and Costa Coffee units.  Impressive customer satisfaction levels.

So with c. a 25% growth in capacity for both core units in the UK (even before international expansion efforts - which appear to be progressing fine) is a reasonable blue sky profitability (say) a third higher than today?

That would put prospective profitability nearer £700m and with an EV (non lease adjusted) of over £9bn there is a little bit of potential upside on a (say) x14 EV/ebit multiple.  

Of course this is on something like a perfect execution and of course the company has to deal with various challenges including the UK Living Wage (inducing the first coffee price rise for a few years at Costa). 

In short, today the opportunity for Whitbread investment initially lays sub £45 with a double up at £40 in my view.  I have noted down the levels. 

On Twitter I noted earlier concerning Syngenta that: 

Too right time for new leadership. Failed re $MON bid. Shares should like this " #Syngenta CEO to step down http://on.ft.com/1Xj6vdP  " $SYT

The c. 6% rise in the share price today brings us back approximately to the CHF330 under which I noted that I thought the shares were cheap (link here). Syngenta remains a strong hold at prevailing in my view.  I know the Syngenta Chairman has come out (as per this piece on Seeking Alpha) saying that the resignation of Mike Mack 'did not arise from a difference over the company's strategy or its rejection of MON's takeover offer' but surely he knew the writing was on the wall.  

Now what Syngenta needs to do is refocus on fundamentals, hit those cost cutting and cash flow generation targets and with a fairer wind from underlying agricultural demand - and not such a dogmatic attitude on M&A - a CHF400 share price is plausible. 

Staying in Switzerland, the stand-out chart for me from the ABB numbers was this one citing 'continued hard weather sailing': 

Certainly the lack of order progression geographically is notable but a book-to-bill of over x1 and a cash conversion in excess of 100% has its own signalling reward.  The key positive is the continued turnaround plan centred on cost cutting.  

I was too early in calling the shares a 'buy' a year ago (link here) but this high teens CHF share price double bottom is opportunistic.  I bought more stock at the height of the Swiss franc revaluation in January/February this year and my instinct is that with the shares currently trading at a barely double digit static EV/ebit valuation and a well-covered 4%+ dividend yield (plus buyback), ABB is a thematic longer cycle industrial business to believe in.  You can imagine what the switch chart with GE (link here for my latest research on that name, which I am still a buyer on) looks like. 

Syngenta - unimpressive results and so the pressures on management (and quite rightly so)

I had hoped that after the misguided turning down of Monsanto's sensible offer Syngenta would get all radical and start generating shareholder value in a very overt fashion.  Ok - as I noted here - they keep on talking about shareholder value and have announced a couple of limited disposals and a buyback...but I remain disappointed by the post-Monsanto efforts.

Also disappointing were today's Q3 (sales only) numbers which despite talking about 'robust free cash flow' and 'on track to deliver targeted operational leverage savings' also included a 'mid single digit decline in reported ebitda' and blamed exchange rates for the helping contribute to this.

What was also notable was a lack of pricing but on the conference call this was confirmed to be only happening in Brazil where the economy is clearly very difficult...

...and the pricing of glyphosate pricing was notably poor in the country: 

However it was not all bad.  There were some pockets of strength in seeds...

...and in crop protection too: 

In short the numbers are not falling off a cliff but with numbers mentioned during the conference call of US$0.75bn free cash flow and US$2.6bn of ebitda implying a c. 3% free cash flow yield and a greater than x10 EV/ebitda ratio much work needs to be done.  The flow through from better FX translation provides part of this, as will lapping easy comps in areas such as Latam / some of the positive structural positives around agricultural investment but ultimately Syngenta simply need to help themselves too - and it is this latter point I have creeping concerns on. 

It is interesting to note that the share have caught a touch of support today despite these patchy numbers indicating there is value (as I noted for Monsanto too - see here).  This means you don't sell the shares but hold on awaiting the positives and potential above.  I just wonder if this includes an activist trying to evolve the now slightly tainted management team. 

Structural positives, tactical challenges...so what to think about Monsanto shares?

It has not been the greatest summer for Monsanto between the failed Syngenta bid (link here) and generally tough agricultural markets.  The last time I wrote up Monsanto results (back in June - link here) I observed that:

'...my instinct on Monsanto shares today is still to look at the US$100-105 area for a first potential opportunity buy level, adding each US$5-10 down'

And where are the shares of Monsanto now?  Basically US$90...

So the shares are a 'buy' now then?  Well...those aforementioned 'tough agricultural markets' (more later on this) are having an impact and full year 2016 forecasted earnings - as shown below - is expected to be sequentially down...although they still see 20% compound annualised earnings growth for the rest of the decade beyond here... 

...driven by product innovation (check out some of the potential RoIs below)...

 ...and inherent demand to help fill the need for greater crop yields:

I would agree with a lot of these strategic thoughts as a combination of need and innovation drives pricing and hence attractiveness in the underlying story for Monsanto.  Of course - following the failure of the merger talks with Syngenta - this forward story is more exclusively centred on seeds (a combination with Syngenta would have added crop protection interests).  

Back on these tough agricultural markets. There is little doubt that Monsanto's forward view on FY16F earnings were inherently disappointing and reflecting the tough conditions, Monsanto said it planned to cut 2,600 employees over the next two years which is equivalent to around 12% of its global workforce.  That's big / shows the magnitude of the slowdown in regions like Latin America.

Free cash is currently running around the US$2bn level but note that the target ND:ebitda is higher than the prevailing metric i.e. continue to expect over-distribution of the free cash flow generation.  This is reflected by the new US$3bn share repurchase plan (albeit with an additional US$1bn restructuring cost bill too to make the aforementioned job cuts and related).  

So let's put some numbers on this basically good structural story (with some tactical challenges).  At a US$42bn market cap and a US$49bn EV that puts the stock on an EV/ebit of around x12 and a free cash flow yield of 4.8% (with the observation that the proportional distribution is likely to be higher than this).  Underlying these are pretty attractive metrics.  Certainly we could continue to have a tough agricultural cycle and also - I guess - we could see the company come back to the Syngenta merger idea in a more hostile/aggressive way.  

So perhaps not the greatest surprise that the stock has underperformed even Syngenta over the last six months.  Nevertheless - and despite my recently sharply (re)augmented position in the Swiss company, my instinct is to initiate a position in Monsanto too here.