On Tuesday, small cap seed stock S&W Seed Company (NASDAQ: SANW) rose 7.33%, meaning it might be time to take a closer look at it along with another overlooked small cap agriculture stock called CHS Inc. (NASDAQ: CHSCP) as both have put in a good performance verses the PowerShares DB Agriculture Fund (NYSEARCA: DBA) – which has largely sunk but could also be finally bottoming out and poised to rise. Given that the agriculture sector itself and the PowerShares DB Agriculture Fund have not exactly been the best performers for investors lately (e.g. last year's devasting drought etc.), its probably worth taking a closer look at both S&W Seed Company and CHS Inc. to see why they have been performing better.
What Are S&W Seed Company and CHS Inc.?
Small cap S&W Seed Company provides expertise in agricultural breeding, production and processing for the alfalfa and stevia industries. After going public in 2010, the S&W Seed Company has opened new markets, expanded acreage dedicated to the production of alfalfa and expanded its research and development focus. In addition, S&W Seed Company acquired Imperial Valley Seed in October 2012 in order to expand production in the Imperial Valley growing region of California; and in April 2013, the company acquired Seed Genetics International in order to expand production capabilities into Australia.
Meanwhile, small cap CHS Inc. is a Fortune 100 global agribusiness owned by farmers, ranchers and cooperatives across the United States that’s diversified in energy, grains and foods. Specifically, CHS Inc. supplies energy, crop nutrients, grain marketing services, livestock feed, food and food ingredients plus business solutions such as insurance, financial and risk management services. In addition, CHS Inc. also operates petroleum refineries/pipelines and manufactures, markets and distributes Cenex® brand refined fuels, lubricants, propane and renewable energy products.
What’s Good About SANW and CHSCP?
S&W Seed Company’s sudden rise on Tuesday could be explained by the warrant exercise period for its Class A warrants expiring at 5:00 pm Pacific time on April 29, 2013. Any Class A Warrants not exercised by the registered holders automatically expired with S&W Seed Company remitting to the registered holders $0.25 per warrant.
However, the real news for investors came back in March when S&W Seed Company agreed to purchase South Australia’s Seed Genetics International in time to capture most of the latter’s 2013 seed production for 865,000 shares of stock, $5 million in cash and a $3 million promissory note. The combined companies will be the largest non-dormant alfalfa seed producer in the world plus SGI's cost of production is apparently materially lower than S&W's California cost of production. Its also worth mentioning that SGI has about 60% of the market for Australian seed production while bad weather caused alfalfa seed in 2012 to fall from an average of 8 million pounds over the past few years to 5.5 million pounds.
Otherwise and the last time S&W Seed Company reported earnings, it reported a quarterly year-over-year revenue increase of 189% to $13.7 million and a six month revenue increase of 88% year-over-year to $20.4 million. Non-GAAP adjusted EBITDA for second quarter increased 20% year-over-year and increased 172% sequentially plus the company reported a significant expansion in planned production and sourcing of alfalfa seed for the fall 2013 harvest.
Meanwhile and in early April, CHS Inc. reported its strongest-ever first-half profit after second-quarter earnings more than tripled from a year earlier thanks to strong results from the company's energy segment (as in refined fuels business) with profits from that sector soaring from $42.1 million to $234.2 million while profits from agriculture rose 40% to $50.4 million thanks to higher crop nutrient margins and volumes as well as stronger soybean crushing and refining margins that were partly offset by lower earnings in grain marketing.
It should also be noted that CHS Inc. is planning a $327 million expansion to boost refining capacity at a Kansas refinery by 18% from 85,000 barrels per day to 100,000 barrels per day with completion set to take place in phases during the second half of calendar 2015 and the first months of 2016 (Production will come online in early 2016) plus the company has announced that it, ConAgra Foods, Inc. (NYSE: CAG) and Cargill plan to combine their North American flour milling businesses into a new venture that will control more than a third of US capacity. ConAgra Foods and Cargill will each hold 44% stakes with CHS Inc. holding the remaining stake.
Stock Performance: SANW & CHSCP vs. DBA
On Tuesday, S&W Seed Company rose 7.33$ to $9.22 (SANW has a 52 week trading range of $4.43 to $11.40 a share) for a market cap of $85.50 million plus the stock is up 19.4% since the start of the year, up 40.8% over the past year and up 148.5% since June 2010 while CHS Inc. rose 1.25% to $32.40 (CHSCP has a 52 week trading range of $29.06 to $33.00 a share) for a market cap of $392.70 million is up 8.5% since the start of the year, up 9.6% over the past year and up 27.9% over the past five years.
Meanwhile, the PowerShares DB Agriculture Fund is down 6.2% since the start of the year, down 3.6% over the past year and down 28.6% over the past five years.
Here is a quick look at the recent technical charts for S&W Seed Company and CHS Inc. along with the PowerShares DB Agriculture Fund:
The Bottom Line. For investors who have a stomach for some uncertainty and for bottom fishing, the PowerShares DB Agriculture Fund is worth a closer look while more conservative investors interested in individual small cap agriculture stocks would be wise to check out S&W Seed Company and CHS Inc.
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