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Wall Street bullish on agriculture

Analysts think a jump in farm income and ag stock prices is imminent.

After years of cheering for technology and Internet stocks (with disastrous results), Wall Street has taken a shine to agriculture. As is typical with analysts, most got on the hay wagon a bit too late and missed some nice gains. But now that they’re piling on, the ride in ag stocks could get even more interesting.

Equipment. Stock analysts such as Todd Hinrichs say Deere and Company (DE) represents one of the best buys of 2002. Hinrichs, who works for the firm ABN AMRO Inc., says Deere is “shaking off a negative perception in the investment community that has dogged the company throughout its life.”

Although Hinrichs has always liked Deere as a company, he wasn’t always bullish on the stock. A year ago, when Deere suffered a severe earnings shortfall in a tough economy, he rated Deere as a “hold,” which in analyst speak really means “sell now or you’ll end up holding the bag.” Nevertheless, if you held Deere stock over the past year, you’ve already tallied a decent return.

Now Hinrichs sees a turnaround in commodity prices and thinks the U.S. Farm Bill should be a huge boon, allowing the average Midwestern corn and soybean farmer to experience a 20% boost in net income on either the House or Senate bills. Hinrichs says his recent price target of 50 for Deere is conservative.

Not everyone is in love with Deere’s prospects, though. Standard & Poor’s recently placed its single-‘A’ corporate credit rating on Deere & Company on CreditWatch with negative implications based on continued weak operating performance from all of Deere's three equipment segments (agricultural equipment, construction equipment, commercial and consumer equipment) and concern about the timing and magnitude of a recovery of the farm equipment industry. S&P says the ag equipment industry is in its fourth year of a severe downturn with no rebound yet in sight. Its report also expressed concern about Deere’s increased financial leverage.

Though Deere is the market share leader, the hottest ag equipment company has been AGCO (AG). The company’s stock has more than doubled in price in a year. Now that AGCO has acquired the Challenger line of tractors from Caterpillar, brokerage houses such as Bear Stearns and Morgan Stanley see still more upside, pegging their price targets for AGCO at around 30. Analysts also like construction equipment giant Cat, which still builds engines and many components for the Challenger tractors.

Meanwhile, Case New Holland (CNH), dogged by the debt of its parent company Fiat, hasn’t gone anywhere but down. However, the company believes an aggressive debt restructuring effort by Fiat, successful new ag products, and a common platform marketing strategy that keeps excessive inventory from sitting in the lot could help turn things around as the ag economy heats up. Analysts aren’t singing CNH praises yet, though.

Chemical and seed. Mega mergers have made it difficult to find many publicly traded chemical and seed companies that are purely agricultural businesses. The two standouts are Monsanto (MON) and Syngenta (SYT).

Monsanto, which has long resided in the crosshairs of public scorn and scrutiny, appears to have dodged at least one bullet by spinning off its industrial chemical business into a separate entity called Solutia a couple of years ago. Solutia has since been hammered by lawsuits regarding PCB contamination from what were once called Monsanto chemical plants in Alabama and other states.

The new Monsanto, meanwhile, is in the clear and could start riding high on the success of its Roundup Ready seed/chemical packages. In the field, Monsanto’s DeKalb brand seed dealers report that they are stealing market share from their biggest competitor, DuPont-owned Pioneer Hi-Bred. Sales of Monsanto’s Roundup herbicide have increased due to rapid adoption of Roundup-resistant crops.

With nearly 100 different chemical brands and NK Seed, Syngenta is the largest ag-only chem/seed company. The company hopes it can defend its existing product lines against Monsanto's Roundup Ready onslaught. Syngenta’s marketing campaign implores farmers to use a wide range of chemicals to prevent herbicide-resistant weed problems that could result from an overuse of Roundup. Playing both sides of the fence, Syngenta also hopes it can grab some of the Roundup Ready market from Monsanto with its own glyphosate product, Touchdown IQ. Monsanto has counterattacked by calling Touchdown a “Roundup imitator.”

As the battle between Monsanto and Syngenta rages on, Wall Street appears to have its money on Monsanto. Monsanto boasts a higher price-to-earnings ratio, and Merrill Lynch rates Monsanto a long-term strong buy. Syngenta has thus far gone relatively unnoticed by investors, though its stock price has been creeping up in recent weeks.

Ag technology. The wild card in the seed industry is the potential for another StarLink-style genetic contamination debacle. If genetically altered grain or pollen turns up where it doesn’t belong, it could hurt Monsanto as well as Syngenta. Monsanto says new handling techniques, commodity channeling and tracking technology have reduced the risk. But if it is wrong, expect environmental testing company Strategic Diagnostics (SDIX) to do well. The company blew away its earnings numbers for one quarter by selling grain test kits for the StarLink Cry9c gene. Now that the crisis appears to be over, the company’s stock price is once again flirting with mediocrity.

Trimble (TRMB) company stock boomed and busted last year. It’s taken longer than investors expected for Trimble’s GPS-based precision agriculture equipment to revolutionize agriculture. That’s let foreign competitors such as Australia’s Beeline Technologies to move in to claim a piece of the precision pie. Nevertheless, new products that are easier to use, and a boom in farm incomes, could make Trimble’s high-tech products look less expensive to cost-conscious farmers and truck fleet managers. Analysts are currently neutral on Trimble, but they expect earnings to grow at more than 20% per year over the next five years.

If you look at stock prices and listen to analysts, Wall Street seems to think a golden age of agriculture is just around the corner. Whether that’s a blessing or a curse remains to be seen, especially considering how far off the mark the Street was on Internet and technology stocks. Farmers know there’s still plenty of rocky terrain ahead. If there is evidence of farmer optimism, it’s that farmland values are still strong. Proceed with caution.

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