Ag Growth International (TSX: AFN) was a 2020 Covid purchase – the stock tanked 60% in a month. The theory was that industrial manufacturing of farming equipment would survive a global pandemic as people would still need to eat and agricultural infrastructure would be one of the “favoured” pandemic exclusions that governments would give for reasons of food security.
The world did not end with Covid and now the analytical lens views the corporation as a typical manufacturing company in the agricultural sector. There is plenty of competition, but the industry in general is reasonably profitable with a certain degree of entrenchment.
Unfortunately for myself and other investors, Ag Growth has a track history of shooting itself in the foot. In 2021, a couple defective grain towers manufactured by the company imploded and this resulted in an approximate $100 million hit to cash for warranty remediation.
Fast forward to today. Ag Growth announced that their 2024 expected adjusted EBITDA results will be $20 million less than expected (approx. $260 vs. $280 previously cited) with the excuse of project delays, slowing markets, etc.
An earnings guidance warning is par for the course for any company. However, what makes this particularly damaging is when looking at the trajectory of their previous earnings releases:
August 7, 2024: “Adjusted EBITDA for full year 2024 in the range of $300 to $310 million with full year 2024 Adjusted EBITDA margins greater than 19.0%”
November 5, 2024: “Adjusted EBITDA for full year 2024 of approximately $280 million;
Adjusted EBITDA margins for full year 2024 of approximately 19.0% with reduced Farm mix offset by further operational excellence initiatives to align costs with current business conditions”
… in the November release there was additional colourful language suggesting that the fourth quarter would be great and they even initiated a share buyback program.
On November and December 2024, Ag Growth repurchased 208,800 shares for approximately $11 million (or roughly $52.58/share) off the open market.
Here is a case of management that clearly should not be in the forecasting industry – not only were they unable to project their own business half a year out in advance, but they blew ten million dollars buying back stock as late as the end of December 2024 – when they should have been perfectly aware at that time that they were not going to meet their prior quarter’s guidance. The 208,800 shares they bought back could have been purchased for much cheaper, but the more prudent capital allocation decision would have been to continue deleveraging as it is clear that when you can’t predict your own business, your optimal leverage ratio should be much lower!
On May 29, 2024, AG Growth reported they turned down an unsolicited buyout offer, which should seriously be reconsidered. The financial metrics of AFN compared to others in their industry continue to remain relatively cheap (especially more so now after their stock has gotten hammered today), and perhaps the board of directors should alleviate management of the burden of forecasting and capital allocation by shopping out the company.
I am still unhappily long on this stock, albeit I did pare some of my position in 2023 in the mid-50s.
when a board responds like that to a bid you know they don’t care about shareholders