American Vanguard (AVD)

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Lawrence Gu

American Vanguard (NYSE: AVD) makes specialty chemical products for agricultural and commercial uses. The company produces chemicals for crops, human, and animal health protection, including insecticides, fungicides, herbicides, amongst others.^[1] AVD also distributes various pharmaceutical and nutritional supplement products. The surge of environmentally and organically conscious consumer will place pressures on GMO that AVD provides.

Business Growth

While AVD's crop business increased by 13% from FY2009 figures at $180.8 million to $204.4 million in FY2010, AVD's non-crop business decreased about 12% over net sales of $28.5 million in 2009 to $25.1 million.^[2] AVD attributes better crop business performance to leaner inventory levels in the distribution channels, along with the fact that the company was able to sell most of its seasonal products into the channel effectively due to favorable Midwest weather conditions.

The positive factor was offset by reduced sales of Orthene, a chemical AVD produces, due to heavy pricing pressure from generic competitors.^[3] Going forward, the ability to have stricter and leaner inventory levels is going to help the company sustain its gross margins, as AVD operates in a mature industry.

Key Trends and Forces

Environmentally and Organically Conscious Consumers Push Downward Pressure on GMO Producers

AVD specializes in Genetically Modified Foods, which use plants whose genetic material has been altered using genetic engineering techniques. From a business standpoint, GMO's are engineered to be more susceptible to harsher environmental conditions, improved shelf life as well as increased nutritional value. By doing so, GMOs increase the yields per acre in many ways, from reducing the need of insecticide, to being able to weather a rough harvest, and to selling bigger fruits that increase productivity. Despite these benefits to farmers, consumers that have become environmentally conscious are at opposite standpoints with companies such as AVD. By supporting organic consumption, AVD's top-line is pressured as it is a chemicals manufacturer.^[4] The coexistence of GMO plants with organic crops for example, has made farmers under EU regulations to avoid mixing foods and feed produced from GM crops and conventional or organic crops.

Agricultural Goods are Highly Tied to Weather and Influence AVD's Profitability

As a chemical agricultural company, AVD is hit by both sides of the businesses, the cyclical nature of the chemicals business and the seasonal and high dependence to fair weather in agricultural business. In particular, various agricultural seasonal patterns and weather conditions will bring varying amounts of pests, which thereby influence the yearly demand of pesticide.^[5] Inclement may also disrupt field work during the planting season, which may result in a reduction of the use of agricultural products. Finally, as AVD is tied to several key chemicals as its inputs, its costs are highly driven by commodities and those selling prices cannot be controlled for.

Competition

The agribusiness market is highly fragmented and therefore price competition drives down the gross margin for all companies. The market is also in a mature stage, in exception to GMOs which require large R&D from AVD's suppliers. Key competitors include:

• Agrium (AGU) sells crop nutrients, crop protection products, seed and services directly to growers. It has operations around the world and it markets controlled-release crop nutrients and micronutrients in the broad-based agriculture.

• Mosaic Company (MOS) is a producer and marketer of concentrated phosphate and potash crop nutrients for the global agriculture industry. It is a supplier of phosphate- and potash-based crop nutrients and animal feed ingredients. It mines phosphate rock in Florida and process rock into finished phosphate products at facilities in Florida and Louisiana.^[6]

References

1. ↑ AVD FY2010 Form 10-K, Pg 2
2. ↑ FULL YEAR: AMVAC NET SALES UP 10%, RETURNS TO PROFITABILITY
3. ↑ Monsanto, Amvac Announce Crop Protection Collaboration
4. ↑ Amvac Chemical Prepares To Launch A New Potato Sprout Inhibitor
5. ↑ Monsanto, Amvac Announce Crop Protection Collaboration
6. ↑ MOS FY2010 Form 10-K, Pg 2