Super Cheap Agricultural Penny Stock Poised for Growth

With the volatility in various markets, one thing is for certain: the world’s population continues to grow. That means more mouths to feed, and agricultural commodities should benefit from higher levels of demand over the next decade. With over 1.3 billion people, China requires much higher supply levels of agricultural commodities to meet increasing demands, which should open the door for higher corporate profits.

One way to increase corporate profits when prices for agricultural commodities continue to go up is through higher average crop yields. One of the more interesting stocks when it comes to agricultural commodities is Yongye International, Inc. (NASDAQ/YONG). This firm is one of a few in the agricultural commodities sector that develops and sells liquid and powder compounds used in addition to traditional fertilizers. The compounds consist of fulvic acid, mixed with further nutrients that help the development of plants. (Source: Yongye International, Inc. web site, accessed November 28, 2012)

Yongye is a Chinese-based firm, which has caused a lot of investors to shun the stock simply because of its location. While some Chinese-based companies have had questionable accounting standards, this doesn’t mean that all Chinese stocks are bad. This leaves the door open for opportunistic investors to accumulate cheaply valued companies with strong prospects for corporate profits growth. China has a large population with limited farmland. This means that increasing yield for all agricultural commodities is extremely important.
The company has a network of over 810 distributors, as well as 32,015 independently owned retailers covering in excess of 30 provinces in China. For the third quarter 2012, Yongye International reported financial results that were a bit complicated. The company initiated a new policy since the fourth quarter of 2011 in which it will only recognize revenue upon receipt of cash, not when shipments are actually made.

For the third quarter of 2012, Yongye increased shipments by 19.6% over the same quarter in 2011; however, revenue and corporate profits decreased, 7.7% and 5.9% respectively. Most of the revenue and corporate profits the company reported for the third quarter were actually from shipments made in the first quarter of 2012, which is a non-peak part of the year. The increase of 19.6% in third-quarter shipments will be recognized as corporate profits over the next couple of quarters as the payments come in from distributors. (Source: International, Inc. press release, “Yongye International Announces Third Quarter 2012 Financial Results,” November 9, 2012.)

The chairman and CEO of Yongye International, Zishen Wu, stated: “Despite the impact we continue to feel from the delayed revenue recognition for certain distributors, our business trends remain very strong. Shipments for the quarter were up almost 20%, and we continue to expand our reach while solidifying our brand by increasing the number of branded retailers with whom we partner. Additionally, during the quarter we completed our capacity expansion project at the Wuchuan Factory. We have now increased our manufacturing capacity by 52% to 70,000 tons, compared to the 46,000 ton-capacity that we had before this project was initiated.” (Source: Ibid.)

Some investors in agricultural commodities might be impatient and get out of the stock simply because they briefly glanced at the headline corporate profits numbers, and didn’t fully understand how this firm recognizes revenue. The firm clearly sees significant potential for growth in the agricultural commodities sector in China, as well as the subsequent rise in corporate profits. It certainly wouldn’t be expanding its manufacturing capacity by such a large amount if it didn’t believe that demand will be there in the future.
I had previously discussed Yongye’s stock when it was trading just over four dollars per share. At that time, I mentioned that the stock was cheap, and it remains still very reasonably priced. At a forward price-to-earnings ratio of just over two times, the stock still trades at a discount to book value of 0.67. The stock now has a clearly well-defined support line at $4.75. Most likely, Yongye will trade in a range-bound manner until we get closer to next couple of quarters’ financial results, which should show the improved level of shipments the firm has seen in the current quarter. A move above $5.75 would be quite bullish, indicating that there is a large amount of buyers who are anticipating a much higher share price and can’t accumulate enough shares at the current level.

While no one can predict the price of agricultural commodities, we are all aware of the growth in the world’s population. As citizens around the world continue to grow wealthier and the population expands, agricultural commodities should continue to do well.

Source: http://www.pennystockdetectives.com/