Weakness is growth sectors and ongoing geopolitical concerns have investors looking for defensive names and reasonable valuations to buffer portfolios from volatility. Investors also need to look worldwide for value, and recent events in Europe have created a climate of uncertainty that can provide opportunities for those with a long-term outlook. One such opportunity is Luxembourg-based agribusiness firm Adecoagro S.A. (NYSE: AGRO) which is a diversified farm concern with operations in South America.
Adecoagro is an integrated industrial farm concern that plants, harvests, and sells a diversified portfolio of crops including wheat, corn, soybeans, oilseeds, peanuts, and cotton. The company also has dairy and sugar farming operations, rice farms, and a sugarcane ethanol business that also generates electricity which is sold back to the power grid. Dairy product production includes raw and powdered milk, as well as a variety of cheeses, The firm owns and operates more than 220,000 hectares of farm land across Argentina, Brazil, and Uruguay as well as an electric generation capacity of about 240 megawatts. The company’s market cap is just over $1 billion so there is plenty of room for growth.
AGRO looks attractive from a valuation perspective, currently with a price-to-earnings ratio (P/E) of about 9 and an EV/EBITDA ratio of 3.7. Comparable agriculture firms in the small-cap universe include Mission Produce (NASDAQ: AVO) with a P/E of about 21 and an EV/EBITDA of 11.8, Vital Farms (NASDAQ: VITL) with a P/E of over 100 and EV/EBITDA of 76, and Alico (NASDAQ: ALCO) with a P/E of about 6 and EV/EBITDA of 5.5. The company is lightly covered in the analyst community, likely due to its small size, with 3 analysts currently providing estimates. Of those analysts, 2 gave a Strong Buy rating on the stock, and 1 has a Buy, with an average target price of $12.33 per share, which represents an attractive upside from current price levels.
The defensive nature of Adecoagro’s business can provide a bulwark against higher volatility names that populate investors’ portfolios and can provide diversity for those that may be overweight in technology and communications stocks. Despite the value-oriented makeup, AGRO has displayed solid growth in recent years, with 1, 3, and 5 year EBITDA growth rates of 90.8%, 42.1%, and 20.2% respectively. This compares favorably to the same metric and periods for the industry of 49.4%, 17.8%, and 9.9%, and the S&P 500 rates of 45.4%, 25.4%, and 20.8%.
Turning to profitability, the company’s management appears to be delivering solid operating results which the market has not yet fully recognized. AGRO has a gross margin of 47.2% and a net margin of 11.5%, well above the industry averages of 12.3% gross margin and 4.6% net margin. The company’s return on equity of 12.4% indicates that the company is making good use of shareholder capital. The low current valuation allows investors to purchase the company’s growth at attractive prices.
Strong market performance, particularly in growth-oriented stocks and sectors over the past several years has shifted many investors’ portfolios to be overweight those areas. In these cases, adding defensive value-oriented names can be prudent. Adecoagro checks a lot of boxes for investors seeking diversification, such as small market capitalization, geographic diversity with business headquartered in Europe but operating in South America, and business units that cover most of the agricultural & farm sector with a small alternative energy component. AGRO could be an attractive opportunity to buy into a growing business that is very reasonably priced.
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