American Vanguard (AVD) is a specialty chemicals manufacturer that through its subsidiary AMVAC Chemical Corporation develops products for agricultural uses. Most of the company’s revenues are derived from selling insecticide and herbicide products, which accounted for 45% and 30% of total sales in 2011, respectively, as well as other crop and non-crop offerings. Over the last two years, crop prices and farmers’ incomes have increased dramatically and American Vanguard’s sales have surged along with them. Indeed, farmers are now planting more acres of corn, soybeans, and wheat than ever before. According to the U.S Department of Agriculture, the amount of corn planted this year is estimated to rise to 96.4 million acres, up 5% from last year, and the highest planted acreage in the United States since 1937. The same goes for soybeans and wheat, which are being planted at similar, albeit slightly slower, rates than corn. What’s driving this are record increases in crop prices stemming from a number of factors, including increased global demand for food, animal feed, and bio-fuel, reduced food supplies from drought conditions in the Midwest, and farmers’ desire to capitalize on the high prices.
With crop prices growing by leaps and bounds, growers have a financial incentive to invest in products that would increase their yields and protect their crops. Additional factors play in American Vanguard’s favor. As prices rose further, many farmers abandoned their practice of rotating crops, which increases pressure from insects. Moreover, prolonged use of certain kinds of herbicides lead to resistant weeds, which led to increased demand for the company’s products. All in all, it is fair to say that American Vanguard is well positioned to participate in the exceptional growth of the crop protection market.
For the third quarter of fiscal 2012, American Vanguard posted earnings of $0.28 a share, easily topping consensus estimates. This was a 75% increase in profits over last year. Moreover, the gross margin and the operating margin both expanded, thanks to operating efficiencies and good expense controls.
Investors have taken notice, too. American Vanguard’s stock price is already up nearly 200% over the last 12 months. However, the stock market is a forward-looking mechanism, so it is necessary to consider whether or not there is potential for further upside here. At the recent price, AVD stock is trading at 21.4 times our 2013 earnings-per-share estimate, a lofty valuation, even when considering the company’s healthy growth prospects.
However, recent developments, such as the company’s partnership with Monsanto to co-market its Impact brand of herbicide could potentially boost that product’s reach significantly in 2013, given Monsanto’s scale and reputation in the agricultural sector.
Over the long-run, demand for the company’s products should increase exponentially as rising global populations strain the planet’s food resources. Plus, only a fraction of the total market is currently utilizing soil insecticides, so the opportunities remain. The potential for expansion is considerable in our view. Thus, the fundamental case for the American Vanguard’s stock is strong.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.