Agricultural – Profit From Surging Prices
You know I like to read random magazines… I love flipping through industry journals, sub-niche business magazines, and newspapers that put most readers to sleep. Why am I so excited about these random sources of information?
Because occasionally I uncover a golden nugget.
A nugget of information can sometimes turn into a very profitable, money making idea. And that’s just what happened the other day. I was sitting at my desk flipping through the latest issue of Western Farm Press magazine.
Yes, that’s very random. While I live in the west, I certainly don’t own a farm, ranch, or orchard… Yet I read it religiously.
Now, most of the information contained in the multiple pages of news print is very farmer focused. They’re discussing the latest industry meetings, conferences, and new ways to deal with weeds and pests. It’s interesting but nothing really actionable from my end.
Then I came across an article about farm equipment.
I had no idea used equipment prices are skyrocketing. Farmers are scouring the land for tractors, planters, harvesters, and other farm equipment. If and when they find it, they’re often paying through the nose for it!
The entire article talked about how farm equipment prices are heading higher… some by as much as 20% in just the last few months. That’s a big increase in just a short period of time.
Why are prices jumping?
It’s all because of the surging value of commodities.
Cotton’s up to record levels, corn is up, soybeans are up, wheat is near record highs. And more importantly, nobody expects these prices to come down any time soon!
As you can see, the prices of your basic agricultural commodities are up and to the right!
Drivers include strong economic growth in India and China and their rapidly expanding middle classes. Changing dietary habits, rising demand for alternative fuels like ethanol and biodiesel, and the economic rebound in the US are also adding to surging demand.
The list goes on and on.
Needless to say, few people expect commodity prices to head lower.
Not surprisingly, farmers are scrambling to take advantage of the high prices. They’re trying to squeeze every ounce of productivity out of the land. They’re planting more acres, using fertilizer and advanced seed stock to increase plant yields, and they’re adding equipment to increase production.
As a result, used farm equipment prices are heading higher.
And that means more demand for equipment overall… especially new equipment. The harder it is to find used farming equipment… and the pricier it becomes… pushes buyers closer to looking at purchasing new equipment.
Why buy used when you can buy new for only a small mark-up.
And a handful of companies are going to really benefit from this surging demand.
I’ve found one small company in particular poised to cash in. Best of all, their valuation is ridiculously low.
Take a look at Alamo Group (ALG).
The company produces a number of different lines of equipment.
But what caught my eye was their agricultural group. Alamo produces equipment under a number of equipment brand names including… Valu-Bilt, Schulte, Bush Hog, Alamo SMC, Herschel, Rhino, and EarthMaster.
This equipment is used by farmers all over the world.
And I’m certain we’ll see demand for their products jump as the agricultural boom continues.
Now here’s the thing…
I like Alamo’s diverse line of products… but I particularly like their small size. The entire company has a market cap of just over $300 million. Compared to other equipment manufacturers like Caterpillar (CAT), with a $64 billion market cap, or Deere (DE), with a $37 billion market cap, Alamo is tiny.
Smaller companies tend to grow faster than the larger behemoths.
What’s more, their valuation is very attractive.
Just look at their P/E ratio. Alamo’s P/E is a small 12.8x trailing earnings. Remember, the P/E ratio compares the price of the stock to the earnings power of the company. CAT has a P/E of 24x and DE has a P/E of 18x. The entire industry trades at an average P/E ratio of 27x.
Here’s the bottom line…
If Alamo starts trading on par with the rest of the industry… their stock would almost double in price! So take a look at Alamo. If you think there is big growth to be had investing in the agricultural industry, this could be a very interesting way to play it.
Category: Commodities
