As the volatility of the stock market has greatly increased lately, investors are struggling to pinpoint safe havens. Agriculture stocks offer some special advantages. As the global population grows, the need for improved agricultural production increases at a fast pace. This secular trend creates a long-term growth driver for agriculture stocks. In this article, we will analyze the prospects of two promising agriculture stocks, Archer-Daniels-Midland (ADM) and Caterpillar (CAT).

Archer-Daniels-Midland

Archer-Daniels-Midland is the largest publicly traded farmland product company in the United States. It was founded in 1902 and its businesses include the processing of cereal grains and oilseeds as well as agricultural storage and transportation.

Archer-Daniels-Midland has proved resilient throughout the coronavirus crisis thanks to the essential nature of its business. In 2020, it grew its earnings per share by 11%, to an all-time high of $3.59, and in 2021 it grew its earnings per share by an eye-opening 45%, to a new all-time high of $5.19. The impressive performance resulted primarily from the segments of carbohydrate solutions and nutrition, which enjoy sustained business momentum.

Archer-Daniels-Midland exhibited a volatile performance record in the decade leading to 2020, with meaningless earnings growth throughout that period. However, the company has much better growth prospects ahead thanks to the acquisition of Ziegler Group, and the nutrition flavor research and customer center opening. The company will benefit from new eating trends, such as alternative proteins. Its nutrition segment has been growing its profit by 15%-20% per year. Thanks to this major growth driver, Archer-Daniels-Midland expects to grow its earnings per share significantly, from $5.19 in 2021 to $6.00-$7.00 by 2025.

While Archer-Daniels-Midland has promising growth prospects ahead, it is also resilient to recessions, as demand for food products is not affected by the prevailing economic conditions. Archer-Daniels-Midland also has significant competitive advantages thanks to its scale and geographical reach.

Moreover, the company recently raised its dividend by 8%. As a result, it has now grown its dividend for 47 consecutive years, and it has a 5-year annual dividend growth rate of 5%. Given its solid payout ratio of 31%, its defensive business model and its growth outlook, the company will easily continue raising its dividend for many more years. Therefore, while the stock currently offers a lackluster 2.2% dividend yield, it is suitable both for growth-oriented and income-oriented investors.

Photo by Dan Meyers on Unsplash

Caterpillar

Caterpillar is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. It operates in three segments: Construction Industries, Resource Industries and Energy & Transportation.

Caterpillar was severely hurt by the coronavirus crisis in 2020, as its customers reduced their investment in new projects drastically due to the fierce recession caused by the pandemic. However, thanks to the massive vaccine rollout and the unprecedented fiscal stimulus packages offered by most governments, the customers of Caterpillar have recovered from the pandemic. As a result, Caterpillar nearly retrieved its pre-pandemic earnings in 2021.

Even better, thanks to its sustained business momentum, it is poised to achieve record earnings this year. Its robust momentum was clearly reflected in its latest earnings report. In the third quarter of 2021, the company grew its revenue 25% over the prior year’s quarter, with more than 20% growth in all its divisions. As a result, it grew its earnings per share 75%, from $1.52 to $2.66, and exceeded the analysts’ consensus by an impressive $0.45. It was the sixth consecutive quarter in which Caterpillar exceeded the analysts’ estimates by a wide margin.

While Caterpillar is enjoying a strong recovery right now, investors should be aware of the high cyclicality of the company, which is not purely agricultural due to its industrial businesses. Its global presence renders the company less sensitive to any single market but the company is sensitive to the underlying global economic growth. Overall, Caterpillar benefits from the secular growth of global economy but it is more cyclical than Archer-Daniels-Midland.

Final Thoughts

When the broad stock market goes through a tumultuous period, it is best for investors to focus on companies with solid fundamentals, i.e., promising growth potential and resilience to downturns. The above two stocks certainly fit these characteristics, especially Archer-Daniels-Midland, which has material upside thanks to its growth trajectory and very limited downside thanks to its defensive business model.