An industry that’s set to grow four times larger should not be under the radar.
That’s especially true when that industry is at the intersection of inflationary, technology, and infrastructure spending trends…
And yet precision agriculture has been just that.
These are the very trends that are driving most of the post-pandemic returns across multiple asset classes… and a recent acquisition of a small-cap tech company servicing this industry shows where the future is heading in the agricultural sector.
Growing Under the Radar
Like the industry as a whole, the $2.1 billion acquisition of Raven Industries (RAVN) by CNH Industrial (CNHI) in this space last week went under the radar… and judging from muted market reactions, the future of this industry is undervalued.
But, adoption in this sector is speeding up.
Precision agriculture provides real-time satellite imagery, UAVs (unmanned aerial vehicles), remote-sensing crop health monitoring, crop acreage, and yield estimates to the agriculture sector.
Farmers are already seeing the positive effects from these technologies in their crop yields. And now that they’re flush with cash from skyrocketing grain prices – spending into new machinery and technologies will only accelerate.
This is why precision agriculture is garnering an outsized portion of research and development (R&D) spending across the industry… which was a catalyst in the acquisition of Raven Industries. This move by CNHI wasn’t just strategic in terms of tapping into this growing industry, it was designed to keep pace with companies like Deere & Co. (DE).
Yet, CNHI’s stock didn’t react positively to the news… share prices dipped 2% after the announcement.
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Typically, the share price of an acquiring company falls after a takeover announcement.
Reasons usually include overpaying for the target company, taking on more debt because of the acquisition, or investors take it as a sign that there’s no more organic growth to be had…
All of these are valid. But none of them apply to CNHI… that’s because their new CEO, Scott Wine, is doing business the smart way.
From a financing perspective, CNHI is acquiring Raven in an all-cash deal… it’s not going into debt. The deal represents only 30% of its Q1 cash holdings.
Yet, the 33.6% premium paid for Raven shows exactly what industry insiders think of valuations.
With the incremental $150 million in earnings before interest, taxes, depreciation, and amortization (EBITDA) that Raven will bring to the table – and considering industry growth trends – this deal will pay for itself within 10 years.
In addition, the deal leverages Raven’s technological infrastructure and patents making CNHI an instant leader in the precision agriculture space.
The deal should’ve sent other precision agriculture companies like AGCO Corporation, Trimble, AgEagle Aerial Systems, and AquaBounty Technologies flying… but they’re still trading on average 8% below their highs.
That’s because companies in the precision agriculture space are being affected by the drop in grain prices since May…
Take a look at this chart…
The Bloomberg Grains Subindex tracks grain prices like soybeans, wheat, and corn.
Prices took a tumble in May, as the dollar began to rise in value. Jeff and I discussed the potential for a cool down in dollar sensitive commodities a few weeks back when it became clear that China would no longer tolerate an appreciating yuan.
The Precision Agriculture Index represents an equally weighted index of the 7 publicly traded companies involved in the precision agriculture space.
You can see these stocks have moved along with grain prices, and as a result have been under pressure since May – when grain prices fell sharply from their highs.
So, how should investors take advantage of this dip in prices?
The Perfect Inflation Play
These days, most investors are actively searching for the perfect inflation hedge… and precision agriculture not only provides the hedge but has the growth.
The industry is at the epicenter of all the factors driving inflationary trends forward, such as limited land, declining labor availability, and rising crop prices…
Investors may want to take advantage of this pullback by considering stocks like CNH Industrial (CNHI), Deere (DE), AGCO Corporation (AGCO), and Trimble (TRMB) for large-cap precision agriculture exposure.
After all, the USDA continues to forecast a falling supply of grains… estimating that corn prices will increase 31% by 2022, and soybeans by 23%.
That means higher prices are here to stay, which will only further support stock prices in this sector.
Regards,
Eric Shamilov
Contributing Editor, Market Minute
Reader Mailbag
What other commodities do you think will be affected by inflation? Do you think precision agriculture is a safe hedge against it?
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