It was a difficult year for investors, with the S&P 500 down almost 20% on the year and many stocks in the index trade down much longer. But there is also a select group of stocks in that index that are trading up in 2022 and are therefore significantly ahead of the market. Moreover, in that select group of positive 2022 stocks some still have more room to make.
Three of these selected stocks are in the agriculture sector: A machinery company Deer (DE 0.57%)seed and crop protection company Corteva (CTVA 0.08%)and an insecticide and herbicide producer FMC (FMC -0.50%). Deere is up nearly 13% year to date, Corteva is trading up a whopping 35% year to date and FMC is up 6.3%. We find out more about these three stocks and why they are attractive to investors right now.
The stock of this agricultural machinery company is often seen as a cyclical play on the success of the farming industry. The idea is that high crop prices usually lead to more income for farmers and a willingness to invest in upgrading machinery. That argument still stands, but over the years, Deere has added another growth arrow to its quiver.
Simply put, his leadership in investing in smart farming technologies, or “precision at,” has revolutionized the farming industry. Whether it’s automated guidance for machinery, precision planting, fertilizer spraying, and harvesting, or even using advanced analytics to improve crop yields and maximize profitability, Deere has a solution to help.
Thus, Deere’s technology solutions are likely to drive customer loyalty leading to greater revenue growth, margin expansion opportunity, and increased service revenue. All told, Deere remains a cyclical play for the farming industry, but it has also demonstrated its ability to consistently outperform its industry, making it an attractive stock for long-term investors.
Speaking of agricultural products, insecticide (control of insects that damage crops) and herbicide (control of unwanted plants in a field) FMC company having a strong year. It’s no secret that food prices have soared this year in line with inflationary trends exacerbated by the war in Ukraine.
FMC’s main markets are soybeans (20% of 2021 revenue) and fruit and vegetables (19%), but rice, sugar, corn and cereals also contribute about 9% of apiece revenue. The good news is that when the price of these commodities rises, farmers tend to plant more, and invest more in crop protection solutions that increase yields.
That’s where FMC comes in. At the midpoint of its full-year guidance, management expects revenue growth of 11% in 2022, with the company able to pass on price increases to its customers.
The last point is important because, along with much of the chemical sector, FMC has experienced cost increases this year. The cost of sales and services is up 17.7% in the first six months. However, if food prices remain high and a slowdown across the rest of the economy leads to a softening of raw material prices, then an opportunity for margin expansion could be seen.
Agriscience company Corteva is also a beneficiary of soaring food prices, but the seed and crop protection company has its own internal growth prospects. Putting aside its closing deals for a moment, Corteva can increase earnings in two related ways. First, it can increase its profit margin by cutting costs. It’s an opportunity that many investors, including Starboard Value, feel has been underutilized by management in the past.
As a reminder, Corteva was created as a result of the DowDuPont merger in 2017 and married Blacka seed-heavy business with DuPont’s focus on crop protection. One key benefit of merging the firms was the ability to generate cost synergies from operating in overlapping markets and sharing technology.
Second, Corteva has a significant opportunity to cut royalty costs by selling relatively larger solutions under its own technology, avoiding royalty payments to other companies.
In fact, the company’s recent investor day presentation outlined aggressive plans to do both. For example, management believes they can increase their earnings before interest, taxation, depreciation and amortization (EBITDA) margin from 17.4% in 2022 to 21% to 23% in 2025, mainly as a result of cost cutting and royalty payments . All told, Corteva is one of the most exciting stocks in the agricultural science sector.