Zacks Industry Rank Analysis is written by Dirk Van Dijk, CFA, Chief Equity Strategist, Zacks.com.
Fun Down on the Farm
While farm proprietors incomes have slipped a little bit in recent months, they are still up 12.3% since November. Bad harvests in many important food producing areas elsewhere in the world last year lead to very high crop prices, and that has caused a bumper crop of profits at many firms tied to the farm economy.
The Farm Machinery "industry" is medium sized with seven firms in it. I have highlighted this group repeatedly over the last six months or so, but usually in the context of the other machinery firms (they are also still doing pretty well).
It is currently in a tie for third place among the 256 different industries -- an improvement of 12 spots from last week. Its average Zacks Rank dropped from 2.29 to 2.00. To get higher yields, farmers have been increasing the amount of fertilizer they apply to crops, not just here but around the world.
The Fertilizer "industry" is right behind the Farm Machinery industry in 9th place (it is the next spot due to a big tie for third place), an improvement of four spots from last week as the average rank was unchanged at 2.22. It is a slightly larger-than-average-sized group with nine firms in it.
Finally, the Agricultural Products industry, the largest of the three with 12 members, is in 23rd place, an improvement of 27 spots since last week as the average Zacks Rank improved to 2.50 from 2.75.
These industries are somewhat unusual in that there are more #1s than #2s. If the Zacks Ranks were random, then one would expect that 5% of the names in an industry would be #1s and 15% would be #2s. However, among the three industry groups here, there are 28 total stocks and nine #1s or 32.1%. The number of #2s is only slightly higher than "expected" at five, or 17.9%.
There are a wide range of market capitalizations to pick from on both lists, ranging from true large caps like Potash (NYSE: POT), Monsanto (NYSE: MON) and Deere (NYSE: DE), down to micro caps. As an aside, there is also one other large cap with very extensive agricultural operations that is not among these three. DuPont (NYSE: DD) is part of the Diversified Chemical industry, even though its single most profitable division is its seed and agricultural chemical areas.
Valuations are for the most part reasonable, particularly it you are willing to look out to next year's earnings. Also keep in mind that an estimate in motion tends to stay in motion, so the odds are that the actual earnings will likely be somewhat higher than are now expected for these firms, meaning that the valuations are actually more attractive than they look.
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