California's record-breaking drought threatens to wreak havoc on the state's multibillion dollar agriculture stocks.
When it comes to agriculture in the US, no state generates more money for the industry than California. The Golden State, the nation's top agricultural producer since 1948, grows almost half of all domestic fruits, nuts, and vegetables. Its agricultural revenue reached a record $44.7 billion in 2012, exceeding second-ranked Iowa's sales by 28.5%.
This year, according to estimates from the California Farm Water Coalition, the drought is on track to reduce the industry's revenue by $5 billion dollars. California Farm Bureau Federation President Paul Wegner expects farmers to leave hundreds of thousands of acres unplanted due to water scarcity. Ranchers are selling off cattle as feed prices and drying grass make it too expensive to care for herds. Even vineyards are cutting back: winemakers tell Wine Spectator that current conditions are forcing them to cultivate a significantly smaller crop.
Is there any hope for agriculture stocks? California is a major player in agriculture, and the ground is only getting more parched. Bloomberg reports consumers can expect rising food prices at the supermarket as drought-ravaged farmlands yield fewer fruit and vegetable crops. Could a price hike offset the impact of a reduced inventory? We decided to take a closer look at agriculture stocks and their ability to effectively manage costs in the midst of this record-breaking drought.
We started by constructing a universe comprised of US stocks belonging to wineries and distilleries in the beverages sector, farm products, and meat products industries. Next, we screened for agriculture stocks with a gross margin higher than the industry average. Gross margin is the percentage of profit a company keeps for every dollar it makes in sales after paying production expenses.
Companies with high gross margins can use that money to pay for other operations, including administrative expenses and distribution to shareholders. A high gross margin shows that a company is able to efficiently manage costs while producing goods and services. Investors should note that gross margin can vary greatly across industries, so the metric is only useful when comparing similar companies.
Click on the interactive chart below to see sales data over time.
Do you think these agriculture stocks will be able to weather this drought? Use this list as a starting point for your own analysis.
Market cap at $287.30M, most recent closing price at $21.14.
Gross margin at 20.50% compared to an industry average of 18.47%.
Limoneira owns 3010 acres of lemons, 1654 acres of oranges, 1169 acres of avocados, and 923 acres of specialty citrus fruits in California. The company is one of the largest lemon producers in the US.
2. Leucadia National Corp. (LUK, Earnings, Analysts, Financials): Engages in manufacturing, telecommunications, land based contract oil and gas drilling, property management and services, gaming entertainment, real estate activities, medical product development, and winery operations in the United States.
Market cap at $10.35B, most recent closing price at $28.29.
Gross margin at 19.70% compared to an industry average of 17.11%.
Crimson Wine Group, a Leucadia subsidiary, produces wine in California's Napa and Edna Valleys. The group runs the Chamisal Vineyards, Pine Ridge Vineyards, and Seghasio Family Vineyards. Leucadia also owns National Beef Packing Company, one of the nation's largest beef processors. Rising beef prices are becoming a challenge for beef processors and could lead to higher prices for consumers.
3. Beam, Inc (BEAM, Earnings, Analysts, Financials): Engages in manufacturing and selling distilled spirits — including bourbon whiskey, Canadian whisky, cognac, cordials, ready-to-drink pre-mixed cocktails, rum, Scotch whisky, tequila, and vodka — worldwide.
Market cap at $13.64B, most recent closing price at $83.37.
Gross margin at 58.10% compared to an industry average of 50.83%.
The company's brand portfolio includes Skinnygirl wines, which are produced in California by the Winery Exchange. Back in 2012, Winemaker Kurt Lorenzi told Wine Spectator that the grapes used in the wines come from all over California.
4. Brown-Forman Corporation (BF/B, Earnings, Analysts, Financials): Engages in the manufacturing, bottling, importing, exporting, marketing, and selling of champagnes, liquer, ready-to-drink products, tequilas, vodka, whiskey, and other distilled spirits.
Market cap at $16.78B, most recent closing price at $79.28.
Gross margin at 69.00% compared to an industry average of 50.83%.
Brown-Forman's portfolio includes California-based Sonoma-Cutrer Wines and Korbel California Champagne.
(List compiled by Mary-Lynn Cesar. Quarterly sales data sourced from Zack's Investment Research. All other data sourced from Finviz.)
Analyze These Ideas: Getting Started
- Read descriptions for all companies mentioned
- Access a performance overview for all stocks in the list
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Dig Deeper: Access Company Snapshots, Charts, Filings
- Limoneira Company (LMNR, Chart, Download SEC Filings)
- Leucadia National Corp. (LUK, Chart, Download SEC Filings)
- Beam, Inc (BEAM, Chart, Download SEC Filings)
- Brown-Forman Corporation (BF/B, Chart, Download SEC Filings)
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