Down (and betting) on the farm
By Globe and Mail/GlobeInvestor.com
In another development that signals the financial viability of investing in agriculture, a Western Canadian investor is pointing to the demand for inceasing on-farm efficiency through farm machinery as a safe haven for those looking to invest their money wisely.
April 20, 2009
by Cheryl Devoe Kim
Population growth has strained worldwide grain stocks, the rise in ethanol production has created a new competing market for corn and the development of Third World countries has led to higher demand for meat.
It is all forcing farmers to be more efficient and that's providing opportunities for investors.
"What this all means is that the use of technology in farming is becoming that much more important," said Brian Pow, vice-president of research at Acumen Capital Partners in Calgary.
Global positioning systems for harvesting, and equipment that prevents overspraying of fertilizers and minimizes water waste, are the types of technologies helping farmers be more efficient. Canadian agricultural equipment providers such as Calgary-based Cervus LP CVL.UN are meeting this demand with increasingly sophisticated offerings, Mr. Pow said.
Tractors today are like Cadillacs," and are tricked out with all the latest technological toys, he said.
Cervus operates John Deere dealerships across Alberta, Saskatchewan and western Manitoba, and has improved its gross margin to 19.3 per cent in 2008 from 15.3 per cent in 2005.
In both the agricultural and construction equipment markets, Cervus has been buying up independent dealerships and its annual earnings almost doubled in 2008 to $22-million.
But one thing investors need to consider is whether falling grain prices and global financial turmoil will keep farmers from spending on the big-ticket items in the near term. The farming sector isn't immune to the global economic slowdown.
"If farmers get cautious, they are not going to spend" $400,000 on a new tractor or other major equipment, said analyst Robert Winslow of Wellington West Capital Markets in Toronto. Although he feels Cervus units are very cheap, trading at about four times his earnings forecast, he expects the company's earnings to fall in 2009 to $1.90 a unit, from $2.52 in 2008. The stock closed Friday at $12.49.
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