AVD - American Vanguard Offers Great Exposure To A Growing Industry

2023-04-17 02:12:26 ET

Summary

• American Vanguard Corporation is a growing company that has realistic targets for 2025 that would bring a lot of value to shareholders through price appreciation.
• The company is exposed to a variety of different niched markets where the products they sell are used, but the overall trend is clear.
• With a strong financial state and no difficulty to buy back shares, I think the company deserves a buy rating right now.

Investment Summary

American Vanguard Corporation ( AVD ) is a leading specialty chemical manufacturer that primarily serves the agricultural sector. Through strategic acquisitions and partnerships, American Vanguard has concentrated on expanding its product portfolio. In 2019, the company acquired a range of herbicides and insecticides from Corteva Agriscience, which added to its agricultural product line. Additionally, in 2020, the company acquired four herbicides from Syngenta.

I think that the strategic acquisitions the company has been doing has netted them a very strong position in the industry and they are able to keep performing at a very decent level. Because of this and the performance in the last quarter , I think the company deserves a buy rating right now. They managed to grow revenues by 9% YoY and also keep string gross margins of 40% despite a very challenging year economically for many industries.

Outlook

AVD has some very optimistic targets until 2025 to achieve and I think they have done the right things to be able to achieve those. In the last earnings report , the company shows its 2025 EBITDA target to be $140 million. Which would be an increase of around 110% from their 2022 numbers of $66.4 million.

In a report by GrandViewResearch they estimate the specialty chemical market to experience a 2.7% CAGR between 2023 and 2030. Not amazing growth per se, but I think a lot of the growth AVD will see will be from increased demand from products specifically niched toward the agricultural industry which is meant to make producing food more efficient and with more yields.

What will be important in the next few quarters will be the margins the company is able to achieve. If there is a slip-up or a clear negative trend starting to happen then those 2025 targets can be reiterated downwards quite a lot.

Risks

One of the major risks with investing in AVD I think is the competition in the industry. AVD is not an extremely large company and there are other competitors like Nutrien ( NTR ) which have a much larger cash position that can be used to keep companies like AVD from expanding and taking market share.

Besides competition obviously being a thing in the industry, I think the inconsistent cash flows might be a hindrance for the company and getting it to have a reasonable valuation. They seem to be on the right path as both the last 3 years have been positive, but saw a big drop in 2022. I think that investors will want to see more consistency from the company and if there is a drop in margins for the company then the share price could drop proportionally to the market leaving investors bag-holding.

But looking at the long-term picture I think AVD is a stable company that should be able to achieve steady growth and the targets they have set aren't unrealistic.

Financials

American Vanguard Corporation's balance sheet as of December 31, 2022, and 2021, shows that the company's total assets increased from $694 million in 2021 to $726 million in 2022. I think the company has been prioritizing some of the things I like to see during a tough economic climate, increasing the cash position. A company with a strong war chest to leverage from will be in a much better position than a company forced to take on debt instead. The increase might not be more than around $4 million in 2021 but the trend is there and I like it.

The long-term debt decreased from $52 million in 2021 to $51 million in 2022, which is a great sign to see in my opinion. I think that the free cash flow of around $40 million puts the company in a very healthy position right now to keep liabilities from becoming an issue.

If the company is also able to achieve its 2025 targets as mentioned above then I think we will see a much higher free cash flow level. This could imply the company is in a good state to also up the share buybacks and boost shareholders' value in the company. I think this is reasonable given the healthy state the company seems to be in financially.

Valuation & Wrap Up

Right now the valuation might seem a little rich looking at the TTM p/e of 24, but as in almost all cases it's more important to look forward instead, and for AVD the p/e is dropping to 17 instead. I think the future valuation is quite fair, it doesn't scream a buy but it's also not that overvalued. The company expects to more than double its EBITDA by 2025 which I think makes this company a growth story.

But looking at another company like Nutrien that also has exposure to the ongoing demand for fertilizers or chemicals related to the agricultural industry then it might be difficult to see why AVD should be considered. NTR has better FCF margins ROC than AVD but I think what might draw me to AVD is the growth story of the company. Nutrien is a much more established company and perhaps the rapid growth AVD could experience can be replicated for Nutrien. Nonetheless, both companies offer investors exposure to a growing demand for fertilizers and chemicals used in agriculture to establish better and higher-yielding harvests.

It will come down to the risk profile of an investor depending on which company they go with. I like AVD because of the optimistic outlook they have and the strong financial state they are in. This all results in me rating them a buy.

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