AgFeed Industries has made two strategic agreements this year that will boost production and expand margins.
The company recently signed a joint venture with M2P2, a production and management consulting firm. This venture will modernize AgFeed Industries' production facilities and enhance total production capability.
The company also formed a partnership with Hypor, a genetics development company which will increase the quality of the hogs. "Both partnerships combined may boost total output by 30%, while improving the product quality. The end result for AgFeed will be a higher market price and contribute to margin expansion in 2012 and beyond.
During the first nine months of this year, AgFeed Industries grew revenues by 20% to $117 million from $97.2 in the first nine months of last year.
Margins have decreased this year as hog prices cannot keep up with the rise in feed price. As a result, profit margins declined to 15.8% from 27% in the first three quarters of fiscal 2012. Naturally, earnings have also come down from last year's record levels, with EPS of $0.18 versus $0.42 in the same period last year.
But investors should view these results as a short-term bump in the road on a long- term growth opportunity. AgFeed shares have fallen 45% since their 52-week high back in June, a reflection of the poorer than expected financial results.
This minor set back should not concern long-term investors in AgFeed. Despite the fall in hog prices earlier this year, the company was still able to bring in $1.9 million in operating cash flow. AgFeed is also sitting on over $36 million in cash, and has minimal debt obligations.
I expect EPS of $0.31 for this year and $0.70 in 2012. Shares of AgFeed are currently trading 14.5-times my 2012 EPS estimate.
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