Email

Cash in on This “Smart Tech” Pioneer

6 | By Michael A. Robinson

Let’s face it … even though we aren’t seeing images of mass starvation every night on CNN, we’re heading for a food crisis so deadly that it’s hard to even picture.

Just this week, in fact, a quick perusal of the Web led me to reports on major food crises playing out in Somalia and South Sudan, an only slightly less severe food shortage squeezing Venezuela and a forecast of a ruinous disaster that will span the globe by 2050.

And if global food consumers and producers maintain their present course, I believe there will be plenty to fear.

The ingredients of an epic disaster are all there. You’ve got water conflicts and shortages throughout the world, an exploding global population (7 billion and growing) and escalating shortages of arable land.

In a special report back in 2008, the United Nations referred to this as a “silent tsunami” of global hunger – and correctly predicted it would only get worse. Today, the UN estimates that about 870 million people remain undernourished – 100 million of them children under 5.

A crisis like this is easy to dismiss – out of sight/out of mind and all that …

But the fact is that we’re getting some early warning signals here in the United States, where a three-year California drought and the lousy winter in the Midwest Dairy Belt have been an inflationary one-two punch for produce and dairy prices.

According to the U.S. Labor Department, wholesale food prices jumped 2.7% in April, the fourth straight monthly gain. Meat prices zoomed 8.4%, the most since more than a decade ago. And the prices of some fruits and vegetables soared as much as 50% in a single month.

The solution to these seemingly intractable problems has always been to throw money at them in the form of more and more aid.

But there’s another answer.

We can devote high-tech resources to the problem.

In fact, this is one of those great opportunities where we can employ high tech to avert a looming world disaster – and reap a windfall profit in the process.

This particular form of high tech is something I like to refer to as “Smart Ag.” And I’ve identified a company that is ready to cash in …

Growing Smarter

The agricultural industry, particularly in the United States, is undergoing a major revolution – but it’s doing so quietly.

According to the U.S. Department of Agriculture, farm productivity grew at a rate of 1.7% from 2008 to 2013. And net farm income over the period increased by nearly 40%, reaching an estimated $120 billion last year.

Thanks to “Smart Ag,” I expect that trend will accelerate.

Farms and livestock center – both here and around the world – are using Smart Ag techniques, sophisticated high-tech tools that make farms models of efficiency, to better their bottom lines and feed more people than ever.

Farmers are using GPS technology to create 3D maps of farmland and drones to survey their crops. They’re “seeding” their fields with sensors that detect crops’ need for water and are using wireless ID tags to track the health and location of their livestock. Farmers can use their smartphones and tablets to get advanced data analytics delivered just about anywhere.

These new technologies, along with farmers’ use of the Internet, are making the “back 40” more productive than ever before.

And today I want to tell you about a company that’s primed to capitalize on the Smart Ag boom. But a lot of investors don’t know about it because it right now makes most of its money the construction and engineering sector.

The Right Direction

If they know anything about Trimble Navigation Ltd. (NasdaqGS: TRMB), most investors think of the Sunnyvale, Calif.-based company as a maker of global positioning systems (GPS) and other geospatial technology products.

But that’s just the beginning.

After years of development, Trimble is also emerging as a major force in Smart Ag.

The company designs and makes guidance and steering software products, along with related mobile apps, that make it possible to more efficiently steer tractors and other farm equipment. This capability includes an autopilot mode that essentially negates the need for in-cab human operators.

Trimble’s Connected Farm hardware/software systems improve agricultural decision making by tracking field, fleet and water management. The Connected Farm systems use the Web to deliver maps, satellite photos, weather reports and other data.

Then there’s the company’s GreenSeeker hardware/software system, which farmers can use to identify unhealthy crops or poor crop yields – early enough to treat them, salvage the planting or start fresh with new seed. GreenSeeker uses high-quality optical sensors – many installed in handheld devices – to gauge the health of crops.

While construction and engineering currently accounts for a bit more than half of Trimble’s business, Smart Ag is growing in importance in Trimble’s business portfolio. It currently accounts for about 20% of sales and 30% of profits.

But that’s just for starters.

A Window for Profits

After reaping record revenues in 2012 and 2013, U.S. farmers have been forced to deal with the weather-savaged ag market so far this year.

Trimble hasn’t been spared. In fact, when it issued its first-quarter results back on May 6, company officials attributed a 6% decline in revenue for its field-solutions unit to the weather – which sent shares down from roughly $38 to $32.

Other investors viewed this as a reason to steer clear. But we believe it is short-term, meaning this is an opportunity – for three reasons.

First, this drop is mostly weather related and short term in nature.

Second, Trimble had a great earnings report. Profits soared, with net income up 38% to $68.6 million and earnings per share up by 37% to $0.26.

Third, over the years, Trimble has quietly become a construction tech powerhouse.

Check out this lineup: Its products automate large industry machines like bulldozers. Trimble makes surveying instruments as well as integrated systems that track fleets of vehicles and workers.

The company also provides real-time data analytics to construction companies’ back offices. And it rounds out this roster with Web and software solutions that deliver what it calls “connected construction.”

For the closely related engineering industry, Trimble offers design and data preparation software for advanced surveying, geospatial data collection and analysis.

In the first quarter, sales for Trimble’s engineering and construction segment were up 16% to $309 million, which was roughly half of all sales. Analysts say the unit contributes 50% of profits as well.

Add it all up, and it’s a great business for Trimble. With this stock, you get not only the stolid, reliable C&E business but also the more dynamic, growing force of Smart Ag.

At a recent share price of $35, Trimble has a $9 billion market cap. It has operating margins of 12.5% and an 11% return on stockholders’ equity.

Moreover, counting this first quarter’s results, Trimble has reported double-digit gains in all but two of the past 16 quarters. That’s four years of stellar results.

With a long track record like that, Trimble gives us a realistic shot at doubling our money.

I’m projecting earnings-per-share (EPS) growth of an average 22% for the next three to five years. That means profits could double in a bit more than three years – allowing share prices to do the same.

By supporting Trimble’s Smart Ag products, we’re helping U.S. farmers continue to get better at feeding the world – even as we cut our own grocery bills.

And because we can double our money as part of the bargain, this is a win all the way around.

See you Friday.

6 Responses to Cash in on This “Smart Tech” Pioneer

  1. Dake Traphagen says:

    So is this a buy recommendation?
    I’m new to your service so I’m not sure if you’re adding this to the portfolio?
    Thanks,
    Dake

  2. Geoff Strowger says:

    This is a common complaint I have about your recommendations: the numbers are not expressed in terms of the share price.

    In this instance, the only time earnings per share is mentioned is in relation to the most recent quarter ….. up 37% to 26 cents per share. Now if I multiply that by 4, it suggests annual earnings of a dollar, which in turn suggests a p/e ratio of 32 …….. double the market average. Even with future growth 0f 22%, the PEG is 1.5 which is expensive. The assertion that the share price will increase at the same rate as anticipated growth in earnings is no more than an assertion.

  3. David R.(Canada) says:

    As far as I’m concerned most of these scientific advances are just like flogging a dead horse.
    The old adage “Take care of the soil and the soil will take care of you.” has been all but forgotten.
    These days farmers see soil as just something to hold the plant upright. The soil is being degraded to point that without tons of chemicals nothing will be produced.
    I believe the money is in selling to home-owners/gardeners. These are the people that will feed the nation when the weather turns against farmers, which it surely will over the next few years.
    Check out how Britain managed to feed itself during WW2.

  4. Gilbert Eriksen says:

    The really smart version of “smart ag” will be the rotary growing machines. Their ability to properly use light for accelerated growth (short growing seasons) will make for VERY DENSE growing conditions. The other main benefit will be the 97% reduction in water consumption with near 100% nutrient uptake in the plants. By keeping the fertilizers in sequestered growing systems that don’t get lost in the local ground water the local drinking water supplies suffer less stress.

    When “smart ag” applications can catch up to these new levels of efficiency they will have something to talk about. In the interim they can offer some stop-gap measures. Any savings is always worth looking into.

Leave a Reply

Your email address will not be published. Required fields are marked *