Bumper Crops Feed Profit Plenty

01/25/2011 10:52 am EST


Gavin Graham

Chief Strategy Officer, INTEGRIS Pension Management Ltd

Grain handling equipment maker Ag Growth International has been living up to its name of late, writes Gavin Graham in The Canada Report.

The rise in living standards for the emerging middle classes in Asia and Latin America and their appetite for a high-protein diet has made agriculture stocks popular with investors over the last decade. Recently they have taken off as food prices are on the rise.

Winnipeg-based Ag Growth International (Toronto: AFN, OTC: AGGZF) is a leading manufacturer of grain handling and storage equipment. AGI has been a beneficiary of the steady growth of the corn and soybean harvests in North America.

There are three good reasons to like this stock: growth potential, an attractive yield, and a key position in a hot sector. The share price has risen more than 50% since mid 2010 but recently pulled back a bit from its all-time high of C$53.50. [Shares closed a bit above C$51 in Toronto Monday—Editor.]

AGI has seen steady growth in revenues and earnings, benefiting from higher crop prices. Although volumes from the Canadian prairies were lower due to a wet spring and summer, the US experienced near-record corn and soybean harvests.

In its third quarter outlook statement, AGI said the successful US harvest is expected to result in low levels of inventory throughout the company's distribution network, "which should be supportive of demand in the first and second quarters of 2011 as dealers replenish their inventory levels," although there may have been some weakness in the 2010 fourth quarter.

Despite rising living standards, it is estimated that most emerging countries can only store 10%-20% of their annual grain production and that spoilage and loss in transportation regularly exceeds 20% of production. AGI believes that modernization of global grain handling, storage, and conditioning is imperative to address global grain shortages, which are once again creating food riots in some parts of the world.

In November, AGI announced it was raising its monthly dividend by 18%, to $0.20 per share ($2.40 a year, figures in Canadian currency). Based on the Jan. 24 closing price of $51.11, the stock will yield 4.7% this year.

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