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Down (and betting) on the farm

Technology's increasing importance to boost efficiency levels will fuel opportunities for the savvy investor

Down (and betting) on the farm

Globe Investor Magazine online, April 20, 2009

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.

In contrast to Cervus and its big-ticket items, Mr. Winslow points to Ag Growth Income Fund, AFN.UN which makes grain storage, handling and conditioning equipment, such as augers, belt conveyors and storage bins. Its portable grain augers - used to move grain around the farm - for example, are priced from $5,000 to $15,000 and have an expected life span of four to five years. This type of equipment is budgeted as an operational expense, generating more stable sales, the analyst said.

Winnipeg-based Ag Growth saw its profit climb in fiscal 2008 to $21-million, up 72 per cent.

The stock closed Friday at $24.65.

The company is a market leader, Mr. Winslow said, with a good brand, strong financials and a robust gross margin of 35.9 per cent in the fourth quarter. And he expects that analysts will be playing catch up with their forecasts for the company this year, which bodes well for investors.

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