Can an Algorithm Beat Jeff Ubben? The Agriculture Industry and Renaissance Technologies
Growth Catalysts Absence
With the seed and crop protection segments as its banner, Syngenta’s operations are spread worldwide and are second only to Monsanto. For the same reason, and in order to reduce the gap between the two, management has put in place an aggressive research and development plan. The most recent news points to the retirement of Antonio Carlos Guimarães, Regional Director Latin America effective Dec. 31, 2013. Karsten Neuffer will succeed Guimarães to lead a region that encompasses important emerging markets, more than 4,000 employees across more than 30 countries and reported sales of $3.7 billion in 2012.
Syngenta continues to see a rise in total sales volumes year-over-year, making it clear that current market synergies continue to be absorbed. However, the quantity of sales has been affected by quality. In other words, currency fluctuations at emerging markets – especially Brazil, with a depreciating real – have negatively affected total revenues. While the tendency is expected to continue through 2014, geopolitical risks and legal rumbles add extra risks to overall performance.
An aggressive research and development strategy for Syngenta is a good policy, but it does no go without its risks. In short, the development of new products in the agricultural industry is expensive and exposes the company to new legal challenges. It is expensive because the results can be poor, and if successful, the environmental impact can derive in new court appearances. Last, future earnings are expected to decline due to the write-down of a portion of its corn production in 2013.
Financially, Syngenta is moderate due to rising debt while revenues and cash flow continue to decline. Currently trading at 20.1 times its trailing earnings, the stock carries a 43% premium to the industry average. Ken Fisher, the guru with the largest position in the firm, kept his stake stable. Renaissance Technology has triggered its seasonal purchase, and if the pattern continues, a sale is expected during the next quarter. Hence, my feelings towards the company are not positive due to the lack of growth catalysts.
Great Moment, Intelligent Management
Current market synergies play into the business model held by CF Industries for two reasons: Brazil is an important phosphate consumer to counter soil salinity, and North America applies great quantities of nitrogen based fertilizers on the production of wheat. With seven nitrogen facilities in North America, and a joint venture in the UK and Trinidad and Tobago, the firm is well positioned in the market. Additionally, the company has not suffered from the demise of potash prices.
The most important characteristic when talking about CF Industries’ future prospects is the vertical integration of its operations. Nitrogen facilities in Canada are connected to customers in the U.S. through an extensive distribution network of rail, barge and pipelines, giving the company an advantage over foreign competition. Additionally, the firm is benefiting from declining natural gas costs in North America and a solid start of the domestic planting season. A risk requiring special attention is the rising competition that may disembark into a price war.
CF Industries’ nitrogen segment is the main growth driver since the Terra acquisition in 2010, supported by the expansion of facilities at Woodward, Okla. and Viterra Inc.’s joint venture. However, management continues to announce further capital investment for the segment. In line, the firm is expected to invest $2 billion between 2013 and 2016. Part of the funds will be obtained through the sell of four dry product warehouses and related assets to Growmark Inc. and one of its subsidiaries.
The balance sheet for CF Industries is strong thanks to rising revenues and great operating margins. The stock currently trades at 8.5 times its trailing earnings, and packs a 40% discount to the industry average. Jeff Ubben is the guru with the largest stake in the firm, and has increased his position throughout the current year. I share his optimism as management has recognized the company’s weak links and started to dispose of them.
Jeff Ubben Wins
I prefer CF Industries over Syngenta to start with due to the premium carried by the seed and crop protection producer. Moreover, the Renaissance Technologies hedge fund investment pattern described low confidence for long-term investments on Syngenta. Additionally, CF Industries has shown to effectively absorb market synergies, while taking the decision to drop low performing segments. Last, capital investments show the confidence felt by management concerning future prospects.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.