Zacks.com releases the latest Zacks Industry Rank. Stocks featured in this week’s analysis includes as Agrium (NYSE: AGU), Hormel (NYSE: HRL), Kellogg (NYSE: K), Monsanto (NYSE: MON) and Sanderson Farms (Nasdaq: SAFM). To see the Zacks Industry Rank and the trend in earnings estimates revisions for more than 200 industry groups, visit http://at.zacks.com/?id=3154.
Zacks Industry Rank Analysis is written by Charles Rotblut, CFA, Senior Market Analyst for Zacks.com.
Flooding caused by last week's storms will force many farmers to choose between replanting new corn crops, planting soybeans or opting for insurance. Due to seasonal factors, the decision will have to be made quickly, particularly for those who want to replant corn.
The USDA had cut its corn harvest forecast as recently as a week ago, before the rains soaked Iowa. On Monday afternoon, the agency estimated that 57% of the corn crop was in good or excellent condition.
Not surprisingly, corn futures continue to hit new records. For investors, the higher corn prices bring both opportunities and risks.
Opportunities in Agriculture
Farmers will replant some crops; this is a certainty. The replanting process will likely further increase demand for fertilizer. This may partially explain why the second-quarter earnings estimate for Agrium (NYSE: AGU) has jumped 56 cents within the past seven days to $3.06 per share. AGU is Zacks #1 Rank ("strong buy") stock and is classified in Fertilizers (http://at.zacks.com/?id=4675).
Seeds and other agricultural products will also be needed. This should bode well for Monsanto (NYSE: MON). One analyst just raised his second-quarter forecast to $1.37 per share from $1.29 per share. The consensus estimate calls for this Zacks #1 Rank company to earn $1.35 this year. MON is classified in Agricultural Operations (http://at.zacks.com/?id=4676).
Higher Food Prices Ahead
The biggest fallout from the flood will be food prices. Higher corn and grain costs will make livestock more expensive to raise. There is some scuttlebutt that livestock population will be intentionally brought down as farmers will be forced to determine whether or not they can afford to maintain the size of their current herds. Sanderson Farms' (Nasdaq: SAFM) CEO, Joe Sanderson, Jr., observed in his company's recent earnings release that egg sets are down from year ago.
The question facing investors is whether meat and dairy companies will be able to offset the higher feed costs through price increases and cost-cutting. Revisions made during the past 30 days are mixed. The full-year consensus earnings estimate for poultry producer SAFM has been revised upwards, while the consensus earnings estimate for SPAM maker Hormel (NYSE: HRL) has been cut. (Both companies reported earnings in late May.)
Processed food companies should also be affected, though analysts have not made many adjustments to their forecasts recently. For example, full-year forecasts for Kellogg (NYSE: K) are unchanged.
SAFM is a Zacks #1 Rank stock. HRL and K are Zacks #3 Rank ("hold") stocks.
K is classified in Food-Miscellaneous/Diversified (http://at.zacks.com/?id=4677). HRL and SAFM are classified in Food-Meat Products (http://at.zacks.com/?id=4678).
It may take several weeks or months for the recent flooding to influence food and beverage company profit margins. Investors should monitor both trends in earnings estimate revisions and profit margins to determine whether or not companies are able to offset the higher costs.
The interactive Zacks Industry Rank List allows you to see all of the companies, and their Zacks Rank, within more than 200 industries. See the list at http://at.zacks.com/?id=3208.
About Zacks Industry Rank and the Zacks Rank
Zacks Industry Rank is calculated by averaging the Zacks Rank for all covered companies within a given industry. The Zacks Rank is assigned to approximately 4400 stocks and ranges from #1 (“Strong Buy”) to #5 (“Strong Sell”). Both the Zacks Industry Rank and the Zacks Rank are quantitative indicators designed to cover periods of 1-3 months.
Since 1988, the Zacks Rank has proven that "Earnings estimate revisions are the most powerful force impacting stock prices." Since inception in 1988, #1 Rank stocks have generated an average annual return of +30%. During the 2000-2002 bear market, Zacks #1 Rank stocks gained +43.8%, while the S&P 500 tumbled -37.6%. Also note that the Zacks Rank system has just as many Strong Sell recommendations (Rank #5) as Strong Buy recommendations (Rank #1). Since 1988, Zacks Rank #5 stocks have underperformed the S&P 500 by 270% annually (+3% versus +11%). Thus, the Zacks Rank system allows investors to truly manage portfolio trading effectively.
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Charles Rotblut, CFA
Phone: 312-265-9352
Email: pr@zacks.com
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