FEED – Can This Stock Bring The Bacon Home?
I’ve been keeping my eyes out for a stock that would be a play on China’s growing economy. By now most of you have probably seen projections of how China’s GDP is estimated to surpass that of the United States within the next 40 years. You may also be aware of the rapid urbanization happening within China and the rising standard of living enjoyed by the middle class there. I wanted to see if I could find a stock traded on the U.S. Exchanges that would benefit from these trends in China. The stock that stood out was AgFeed Industries [FEED] a Chinese company that specializes in the animal feed and production related to the hog industry.
Image from flickr.com
AgFeed Industries popped up after I ran a stock screen on Yahoo’s Stock Screen selection tool with the following criteria:
- Share price between $1-$5
- Market cap between $100 million – $1 billion
- Sales Revenue between $10 million – $250 million
- PEG Ratio below 1.0
Here were the results as of April 2o, 2010:
Image from screen.yahoo.com
So a few notes about the hog industry in China that I thought were worth noting:
- Pork is the primary source of protein for the Chinese consumer
- China’s meat consumption grew at a CAGR of 14% from 2002-2008
- Pork accounts for over half of all meat sales in China
- The pig feed industry is a $20+ billion dollar industry in China
AgFeed began hog production during 2008 and hog production accounts for roughly 60% of the company’s revenue today. Prior to that, the company derived its revenue from animal feed of which there are three types – additive premix, concentrate feeds and complete feeds. Today, AgFeed has about 1900 employees, 31 hog farms (2 of which are breeding farms) and 5 feed manufacturing plants.
As far as I can tell, the company has been profitable for the past 12 quarters. Here are some other financial metrics:
- AgFeed has over $36M in cash and only $4.4M of debt
- The book value of the company is approximately $4/share
- They are forecasting annual revenues to grow from $220-$230M in 2010 to $310-$320M in 2011
So given the compelling growth rate and healthy demand for hogs, I was perplexed to see why the stock price has fallen so far off the peak levels in 2008. Here is a two-year chart of FEED’s stock price on a linear scale.
Image from finance.yahoo.com
At today’s closing price of $4.51, AgFeed is well over 75% off the May 2008 highs. So why the decline?
From what I could gather, here are some of the reasons that may be keeping the stock price at these current levels:
- AgFeed was going through a 5-step reorganization plan during 2009 to realign its two business segments (feed and hog production)
- Hog prices declined in 2009 while corn prices rose meaning it cost more to feed the pigs, but they sold for less
- AgFeed’s plans to market 2 million hogs cumulatively between 2010-2011 may be falling short of projections due to delays in construction and logistics
- AgFeed plans to spin off 20% of their feed business into a separate IPO
- The swine flu fears in 2009 may have contributed to an aversion for hog consumption
- AgFeed has the highest short interest (approx 24% of float) of all stocks in agriculture products industry (BG, DAR, FDP, SEED)
- The introduction of a commodity exchange market in China may be keeping corn prices high which will lower AgFeed’s margins (higher corn prices in China mentioned here)
Still, unless the company’s numbers are misrepresented or there’s something else I have missed, the balance sheet and income statements are stellar. AgFeed is also positioning itself to be the largest hog producer in China. I think this is a stock that does not have a lot of coverage and is waiting to be discovered. From what I can tell, there is only one analyst covering this stock today. Here’s a good research report put out by Rodman & Renshaw that puts a $7 price target on the stock. If you are looking for ways to invest in China, I think AgFeed’s stock presents a great opportunity.
Disclousre: I plan to take a position in FEED this week. Please do your own research before deciding to follow my investment advice as I do make my fair share of incorrect calls.
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Mr. Nice Geek » Waiting for FEED-ING time — May 27, 2010 @ 7:13 PM
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By Brandy V, May 28, 2010 @ 12:02 PM
AgFeed is a huge industry that has been under the trading radar for some time.