In my ongoing efforts to find hidden gems in the investing world, I stumbled upon Adecoagro S.A. (NYSE: AGRO). AGRO is a South American agricultural and industrial company with a low valuation and strong expected growth for 2024. The company is poised to benefit from steady growth in its markets.Adecoagro’s strategies and competitive advantages should help drive growth within these markets. AGRO has a low-cost production model where the company grows its products in areas where it has advantages with productive growing conditions. The company also uses advanced technology with efficient agricultural equipment for its farming and harvesting activities to maximize productivity.
Adecoagro’s Q3 2023 Highlights (Adecoagro Q3 2023 Earnings Presentation)The slide above from AGRO’s Q3 earnings presentation illustrates the top and bottom-line gains that the company achieved in Q3 and for the first nine months of 2023. We can also see how significant the Sugar, Ethanol, and Energy segment is for AGRO. The company derived 74% of adjusted EBITDA from the Sugar, Ethanol, and Energy segment in Q3.
Adecoagro’s Growth Outlook
Adecoagro’s main businesses of farming and sugarcane production are expected to experience long-term steady growth. The company’s Farming segment produces crops such as corn, wheat, oilseeds, soybeans, etc. AGRO is also a leading producer in South America of other agricultural products such as rice and milk.The market for agriculture in South America is expected to grow at about 6.3% per year to reach $376 billion by 2028. As of the end of 2022, AGRO owned just under 207,000 hectares of farmland in Argentina and Uruguay (this excludes sugarcane farms). As of the end of Q3 2023, the company had 213,548 hectares of farmland valued at over $695 million.This increase in farmland should help AGRO produce higher crop yields going forward. AGRO is also benefitting from improved soil moisture due to the El Nino weather pattern affecting South America. The El Nino is expected to last until at least April 2024. AGRO expects to maximize crop yields due to the improved soil moisture.AGRO grows sugarcane which is processed to make sugar, ethanol, and energy. At the end of 2022, AGRO had just under 193,000 hectares of sugarcane plantations in Brazil. About 13,000 hectares are planted on the company’s own land, while 180,000 hectares are planted on leased land. AGRO has a competitive advantage as it runs one of the most efficient sugar operations in Brazil and the world.The average price of sugar is expected to increase by about 2.2% in 2024 to $0.46 per kg. AGRO is in a great position to benefit from higher sugar revenue from the expected price increase. The company’s quantity and quality of sugar is in great shape, with a TRS (total recoverable sugars) content 30% higher in 2023 as compared to 2022. Plus, AGRO is expected to increase sugar crushing volume by 5% to 10% in 2024, which should lead to higher production volume and higher sales.AGRO has been employing a strategy of storing its ethanol since the price of anhydrous ethanol declined 5% and the price of hydrous ethanol declined 7%. The company plans to diligently watch the market for ethanol and will begin selling it out of storage when the price recovers. This strategy will allow AGRO to maximize its ethanol revenue.
Adecoagro’s Q3 2023 Earnings PresentationAGRO is expected to grow revenue at 5% and earnings at about 20% in 2024 according to consensus estimates. The company’s strong EBITDA margin of 31% and net income margin of 10.5% outperformed the sector median EBITDA margin of 11% and net income margin of 5%. AGRO’s strong margins help drive strong earnings growth.
Valuation
AGRO is trading at a bargain valuation, with a forward PE of 7.6x and a forward price/cash flow of 4.4x. This is lower than the sector median forward PE of 18x and forward price/cash flow of 13.5x. Industry peer Dole plc (DOLE) is trading with a higher forward PE of 10.6x and a higher forward price/cash flow of 5.8x. Another industry peer, Hain Celestial Group (HAIN) is also trading higher with a forward PE of 27.5x and a forward price/cash flow of 11x.DOLE and HAIN are expected to grow earnings at 13% and 39% respectively in 2024. So, all three companies have strong expected double-digit earnings growth for 2024. I would expect all three companies to perform well. Even HAIN with its high forward PE may do well to its strong expected earnings growth as investors may continue to reward the stock with a premium valuation.AGRO’s stock has a good chance of increasing at a strong pace with its forward PE below 10, below the sector median, and below its industry peers. The company’s strong expected growth can help drive the stock higher from this low valuation.
Balance Sheet/Cash Flow
Adecoagro has about $350 million in total cash and equivalents and about $1.1 billion in total debt. The company also has about $40 million in restricted short-term investments. This leaves AGRO with net debt of about $707 million. Typically, I prefer companies to run with zero net debt or more total cash than total debt. However, farming is highly labor and capital intensive. So, AGRO tends to run with a higher amount of debt in relation to cash.AGRO has 1.9x more current assets than current liabilities and 1.6x more total assets than total liabilities for total equity of about $1.3 billion. AGRO appears to have the ability to effectively handle its debt. The company consistently runs with positive operating cash flow. AGRO had $491 million in operating cash flow for the trailing 12 months. This was a significant improvement over the $370 million of operating cash flow from 2022.AGRO juggles multiple aspects of its business with its operating cash flow. Over the trailing 12 months, the company spent $226 million in CapEx, paid $35 in dividends, repurchased $29 million worth of stock, and repaid $553 million in debt. The company also tends to issue new debt every year. About $537 million of new debt was issued over the trailing 12-month period. AGRO was left with $178 million in levered free cash flow and $234 million in unlevered free cash flow.
Risks for Adecoagro
AGRO depends on proper soil conditions to effectively grow its sugar and crops. Droughts could significantly disrupt AGRO’s ability to grow its products. AGRO is also at risk of severe pest infestations. The company could lose a significant amount of revenue if weather conditions are not suitable for effective growing and/or if pest infestations are difficult to control, causing severe crop damage.The company is also at risk of the fluctuating prices for its products. The price of sugar, ethanol, and other products can swing significantly. Declines in the prices of AGRO’s products lead to declines in the company’s revenue.AGRO uses significant amounts of fuel oil and other resources for harvesting and transporting its products. Significant increases in fuel could lead to higher costs for the company.
Adecoagro’s 2024 Outlook
Overall, Adecoagro is set up well for 2024. Soil conditions have been conducive for effective crop yields. Sugar prices have been favorable, which helps the company maximize revenue for its largest segment. If these conditions carry over into 2024 as expected, AGRO is in a good position to meet/exceed its revenue/earnings estimates.AGRO’s low valuation leaves plenty of room to the upside for the stock. Analysts have a one-year price target of about $13 for the stock, which is about 17% higher than the current price. This price target looks conservative given AGRO’s low valuation. The stock should be able to increase at least in line with the expected earnings growth of 20% in my opinion. Of course, investors could be pricing in the uncertain risks associated with the company’s business, keeping the valuation and stock price somewhat suppressed.More By This Author:PayPal Stock May Have Finally Found The Bottom (Technical Analysis)Bitcoin: Multiple Time Frame Price Analysis (Technical Analysis)Block: Stock Is Set Up For A Large Move (Technical Analysis)
