Hoggin' All The Profits Commodity producers may thrive even if prices dip.
(FORTUNE Magazine) – Rising natural-resource prices make for rising natural-resource stocks. Many commodity-producing companies could see shares climb, analysts say, as high prices help fatten profits, and that may stay true even if prices recede a bit. With that in mind,we found four ways for equity investors to play the commodity boom.
Food processors such as Smithfield Foods (SFD, $27) are in hog heaven right now, with increased demand due in part to the low-carb craze. That's led to heftier profits from hog-farming operations. Analyst Timothy Ramey of D.A. Davidson expects Smithfield's fourth-quarter earnings to climb to 50 cents a share from a nickel last year. The stock trades for a forward P/E below 13, meaning Smithfield is poised to bring home the bacon.
Soybean prices have zoomed to 15-year highs because of a short crop in the U.S., uncertainty about South American production, and strong demand from China for animal feed. More important for Bunge (BG, $40), the margins on soybean meal and oil are rising. The company, which went public in August 2001, trades at a 2004 P/E below 13, making shares appetizing.
While oil and gas prices continue to make headlines, coal companies stand to gain from new demand for this old-school energy source. That's why investing heavyweights like Capital Research & Management and Wellington Management have loaded up on shares of Consol Energy (CNX, $27). Consol recently upped its first-quarter earnings estimates, citing better-than-expected coal production and higher prices.
For broader exposure to commodity-producing companies, consider a mutual fund focused on the natural-resources sector. The no-load T. Rowe Price New Era (PRNEX), for example, has an average annual return of more than 14% over the past five years. Manager Charlie Ober now devotes some 56% of the $1.5 billion portfolio to the energy sector, less than most of his peers. "It's one of the most broadly diversified natural-resources equity funds," says Langdon Healy of Morningstar. --Y.R.