Top Picks for 2010: AgFeed Industries (FEED)

Wyatt continues, "I've been bullish on China for several years, but my recent 3-week trip confirmed my bright outlook for this emerging market.

"The best news for investors is that just like the rapid growth Chinese economy, many China stocks are profitable and expanding, yet their shares are trading at very attractive valuations.

"AgFeed Industries sells products to distributors and large-scale pig farms. Pork is a big business in China, and the country is the largest consumer of pork in the world.

"In China it is estimated that nearly half of consumer spending goes towards food, and pork is an essential component of the Chinese diet and accounts for over 60% of total meat consumed. My first-hand experience is that pork is far and away the most popular meat in China.

"China discourages pork imports, so suppliers operating within the country need to meet almost all of the nation's pork demand. The country produced 625 million hogs in 2008, almost 50% of the total worldwide production and five-times the number produced in the U.S.

"The challenge for Chinese producers is that undersized backyard farms still account for over 70% of production, and the country has yet to industrialize the farming industry.

"However, the government is encouraging sustainable farming with the goal of increasing food production, and this is a mandate that should bode well for agricultural stocks.

"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 2010 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 2009. 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 2010. Shares of AgFeed are currently trading 14.5-times my 2009 EPS estimate. And looking forward to 2010, shares are valued at just 6-times my earnings estimates.

"For a company with expanding sales and future upside from expanding profit margins, I see significant upside for AgFeed shares which I believe should trade at a P/E of 15.5-times 2010 EPS.

"My AgFeed share price target of $10.50 represents a 138% increase from the late December share price, and provides investors in this stock with lots of upside."

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