Special Free Report From The Motley Fool

The Motley Fool’s #1 TSX Stock for 2019

Thanks for taking the time to access my report. My name’s Iain Butler and I’m the lead Advisor of a service called Motley Fool Stock Advisor Canada.

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But first, I want to reveal my #1 TSX pick for 2019 – and bring you in on what is my current top value play. The last time investors had a similar opportunity, the shares shot from $12 to $40. And I think Mr. Market is offering you and me the opportunity to do it again!

Why? Because this is a heavily cyclical business currently in its “low” phase. When the cycle corrects – as I believe it will – patient investors may discover they’ve earned multiples of their original investment.

So, without further ado…

The Motley Fool’s #1 TSX Stock for 2019

AGT Food and Ingredients, TSX: AGT

Company snapshot

Market Cap: CAD $400m
P/E: N/A
Yield: 3.5%
Recent Price: $16.41
Data as of: 1/04/2018

Why Buy?

AGT Food and Ingredients, TSX: AGT, is among the world’s largest value-added producers and splitters of pulse crops and an international producer, processor, and exporter of staple food products to over 120 countries. For the uninitiated, pulse crops include peas, beans, lentils, and chickpeas, all of which produce edible seeds called pulses.

On the surface, this isn’t a particularly exciting company or stock. It’s not a tech play attracting growth-minded investors. Instead, it’s a deep-value play that we believe has the potential to play out heavily in your favour, if and when the cycle shifts. With the shares trading near a 52-week low today, the timing couldn’t get much better.

In a nutshell…

  • This company owns and operates a global logistics network for pulse shipments – and this network is a highly valuable, almost irreplaceable asset.
  • There is a growing demand for pulses from the developing and developed world, all of which strengthens this company’s position in the market.
  • Best of all, the current cyclical downturn presents a unique and highly promising opportunity to initiate a position.

A deeper dive into the business

AGT’s Pulse and Grain Processing has long been and continues to be the company’s backbone. Its raison d’etre is to source pulse crops from an origination network that spans the globe and includes thousands of local growers, many of which are located in the Canadian Prairies. The company then moves the product through to its supplier and customer network, which also spans the globe.

In recent years, the company has also made a number of moves to build upon this foundational, high fixed-cost logistics business. For instance…

  1. The company has added a Bulk Hauling and Distribution division to leverage its logistics networks with products not sourced by AGT. This division was bolstered in 2015 by the acquisition of two rail lines, Last Mountain Railway and Big Sky Rail, creating one of the largest Class 3 railways in Canada. The idea is that these gathering assets will ramp up utilization across AGT’s entire system.
  2. AGT has added a Food Ingredients and Packaged Food. Anchored by its Minot facility in North Dakota, AGT has rapidly grown into the business of utilizing its raw products and transforming them into proteins, flours, fibres, and starches to be used in human food, pet food, and aquaculture. From one operating production line when the plant was completed in June 2013, the fourth production line is now up and running.

AGT has also signed a 20-year terminal services agreement with Fibreco, which gives it access to a yet-to-be-constructed agriproducts export terminal at the Port of Vancouver — AGT’s first direct access to a tide water port. This is in addition to taking a minority interest in CanEst Transit, a terminal in the Port of Montreal.

While external conditions are currently challenging, this is not a company that’s standing still — not by a long shot.

The valuation and the investment case

Given the nature of the agriculture business, AGT is frequently exposed to variables largely out of its control. This can work in the company’s favour, or not. And currently, it’s not. Shares are trading near a 52-week low.

The current issue can largely be boiled down to a record crop in India, which is having ramifications throughout the global pulse market. It’s essentially taken India out of the import game, and without this one sizeable consumer standing in as a major buyer, the global market has been awash in pulses.

Where this follows through to AGT is in the company’s margins. Generally speaking, the Pulse and Grain Processing business isn’t overly high margin to begin with, but current conditions have made it even less so. This relatively low margin dynamic is why AGT is building the other businesses mentioned above. The thing is, these new businesses are not yet of a size to offset current conditions.

The thing about all of this is that it’s temporary.

This year’s record crop in India is next year’s wash out. Or if prices are bad this year, even if the weather does cooperate, less pulses are planted in favour of other crops, supply goes down, and prices go up the following year, which leads to more being planted. It’s a constant ebb and flow, and right now, we’re ebbing.

Meanwhile, AGT is a better company than it used to be, especially given the higher-margin businesses the company is pushing into. As these businesses grow, there’s every reason to believe overall margins will improve. And with the shares trading for a cheap price today, this stock offers the potential to double and even triple an initial investment, if our thesis plays out as we expect it to.

No investment is ever guaranteed, but as you can see by now, we’re very excited by the potential here.

Assessing the risks

Though we’re confident the industry will ebb and flow as it always has, we’ve no idea about timing. Nobody does. Therefore, one of the biggest risks is related to the company’s financial situation. After all, neither AGT nor us are going to benefit from the inevitable upturn if the company can’t survive the downturn.

The other issue with timing being such a mystery is that the stock could remain at current levels, or worse, for the short to medium term. Prepare for this. You see, the analysts who cover this company don’t have the same long-term lens that we Fools have, and as they monkey around with their quarterly estimates based on what they view as current market conditions, strange things can occur.

To put this another way … patience is required. While the company offers a unique collection of assets, Mother Nature is going to play a role. And she tends to be rather unpredictable. The same goes for a number of other variables.

The Foolish Bottom Line

In our minds, AGT offers a perfect illustration of where we Fools have an edge on the market.

While analysts and other shortsighted “investors” are hung up on what the company is going to report in the next quarter, or even over the next year, we’re more than content to acknowledge the unique assets this company continues to accumulate and proclaim that over time, the value of these assets will indeed be fully realized by all.

That said, prepare for a bumpy ride, especially in the short term. Headwinds persist, but we’re confident this will change. And to take full advantage of this change, you have to be invested before it occurs. That is, right now!

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Disclosure: Iain Butler owns shares of AGT Food and Ingredients. Returns as of May 2, 2018.