According to the United Nations, the world needs to produce 60% more food by 2050 to avoid mass unrest.
At that point, the global population is expected to reach a whopping nine billion people. More mouths to feed, combined with the higher caloric intake of increasingly wealthy societies, will dramatically increase food demand.
Yet, as I wrote last week, the investing herd has stampeded out of agribusinesses.
The Market Vectors Agribusiness ETF (MOO), which was a crowd favorite in 2011, has experienced significant outflows totaling $2.8 billion year to date.
This ETF holds phosphate and potash producers such as Mosaic (MOS) and Potash Corp. of Saskatchewan (POT), in addition to farming machinery manufacturers such as Deere & Co. (DE) and Kubota Corp. (KUBTY).
I’ve scoured the full list of holdings for hidden value, and there was one company in particular that caught my eye…
That company is Norway-based Yara International ASA (YARIY), the world’s largest producer of ammonia, nitrate, and complex fertilizer. Yara has sales in more than 150 countries and helps crop producers provide food for a growing global population.
With low debt levels and the equivalent of $1 billion in cash, Yara’s balance sheet is pristine. That, combined with strong earnings, translates to a very low enterprise value-to-EBITDA ratio of 7.8x. Yara also has an attractive price-to-sales (P/S) ratio of 1.0x.
By comparison, Syngenta AG (SYT), the company with the largest weighting in MOO, has an EV/EBITDA ratio of 13.0x and a P/S ratio of 2.2x. These metrics should give you an idea of the tremendous opportunity that Yara shares represent.
Yara also produces ample free cash flow (FCF) to cover its dividend payments. In the latest 12-month period, the firm generated nearly $2 billion in FCF with a respectable FCF margin (FCF as a percent of sales) of 8.8%.
Yara’s valuation is all the more surprising because the company is well-positioned for growth. In Latin America, its crop nutrition solutions are helping improve crop yields and quality. For instance, Brazil – which has become an agricultural powerhouse – is Yara’s biggest market.
Yara’s primary share class trades on the Oslo Stock Exchange with a market capitalization of $13.6 billion (85.8 billion NOK). Additionally, there are American depositary receipts (ADRs) trading under the ticker YARIY that give U.S. investors an easy way to invest.
Now, foreign withholding taxes on dividend payments are an additional factor to consider with ADRs. Luckily, it’s not a huge concern with Yara. Net of taxes, YARIY still has a solid dividend yield of 2.5% (based on 2014’s annual distribution).
As you’ve noticed over the past few weeks, I’ve identified compelling value in shares of a Japanese brewer and now a Norwegian fertilizer producer. That’s because, while there are still some cheap stocks in the United States, the deep value opportunities tend to be overseas.
We’d be smart to expand our horizons, and these two ADRs are great ways to start.
Safe (and high-yield) investing,
Alan Gula, CFA