Week 100 - Agriculture-related Companies in the Barron’s 500 Table

Situation: Food production is a highly fragmented industry. Most food products are locally produced. People enjoy shopping for food at farmer’s markets but currently there is not enough dietary protein produced to keep up with global population growth. Last year’s drought in the US caused a spike in corn, soybean, and wheat prices, which then caused a spike in farmland values. The US Department of Agriculture projects a good harvest this summer but warns that food price inflation is likely to exceed average inflation by 1-2%/yr for the next few years. 

We sort companies by long-term Finance Value (Col E in the Tables we attach to each week’s blog), which is Reward (total return/yr over one or two market cycles) minus Risk (total return during the 18-month Lehman Panic). The blogs for this week and last week introduce a way to measure short-term Finance Value by using the annual Barron’s 500 Index. The recently released 2013 version gives equal weight to 3 metrics:
   a) sales growth for 2012, 
   b) median "cash-flow based" return on investment (ROIC) for the past 3 yrs, and 
   c) cash-flow based ROIC for 2012.
Our Table for this week shows each agriculture-related company’s Barrons rank in 2013 (Column F) vs. its rank in 2012 (Col G). If the company fell in rank (year-over-year), the 2012 rank in Column F is red-flagged. If the rank was higher in 2012 than in 2011, we consider that to be a timely endorsement of the company’s short-term Finance Value.

There are 27 agriculture-related companies in the 2013 Barron’s 500 Index. Based on long-term Finance Value (Col E), we place 16 of those companies in the “A” list at the top of this week’s Table. Ten of those have moved up in rank with respect to short-term Finance Value (Col F): Monsanto (MON), Altria Group (MO), General Mills (GIS), JM Smucker (SJM), Reynolds American (RAI), Hershey (HSY), Coca-Cola (KO), Agrium (AGU), Campbell Soup (CPB) and Kellogg (K). You’ll note that only 3 of these produce nutritious food: General Mills, Campbell Soup and Kellogg. The remainder, aside from a seed producer (Monsanto) and a fertilizer producer (Agrium), produce things we buy because they give us a buzz (tobacco, caffeine, sugar) or taste good (chocolate, salt).

Bottom Line: We identify 16 companies that have performed well with respect to sales and cash flow over the past 1-3 yrs and outperformed the S&P 500 Index over the past 13+ yrs (as well as during the Lehman Panic). These 16 companies had total returns averaging 15% over the past 13+ yrs vs. 2.4%/yr for the lowest cost S&P 500 Index fund (VFINX), and on average lost only 22.7% during the Lehman Panic (vs. 46.5% for VFINX). Ten of those 16 companies are moving up in Barron’s 500 rank, our measure of short-term Finance Value. Five of our “Top 10” companies are able to fund future growth by using Retained Earnings: Monsanto (MON), JM Smucker (SJM), Hershey (HSY), Agrium (AGU), and Campbell Soup (CPB).

Risk Rating: 4

Full disclosure: I have stock in KO, HRL, DD, CAT, and GIS.

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