AgFeed Industries: Take that to the trough

AgFeed Industries, Inc. (Nasdaq: FEED)
Nanchang City, Jiangxi Province, PRC
http://www.agfeedinc.com/

52-week low / high: $4.10 / $16.36
Shares Outstanding: 27 million
Market Capitalization: $259 million

With China's animal feed market worth about $40 billion and growing, AgFeed Industries, Inc. (Nasdaq: FEED) is literally living high off the hog.

AgFeed manufactures, distributes, markets and sells two main product lines: additive premix fodder for use in all stages of a pig's life, and blended feeds designed specifically for infant pigs. The company operates through three Chinese subsidiaries: Nanchang Best Animal Husbandry Co., Ltd., Shanghai Best Animal Husbandry Co., Ltd. and Guangxi Huijie Sci. & Tech. Feed Co., Ltd.

According to the University of Southern California’s U.S.-China Institute, the Chinese consumed about 621,951,219 pigs in 2006. In contrast, Americans in 2006 ate 104,878,048 pigs. The United States Department of Agriculture stated in a 2007 report that the Chinese consumed 51 million metric tons of pork in 2006, roughly half of the world’s total pig consumption.
 
All good news for AgFeed, which has a nationwide product distribution network across key agricultural regions in China. The company successfully targets customers through direct distribution, wholesaler distribution and franchise store owners who exclusively market its products to end user customers.

The proof is in the pig feed: for the three months ended Sept. 30, 2007, AgFeed's revenues increased 488% to approximately $11.9 million and gross profit increased to about $3.24 million or 323% as compared to the same period in 2006. Net income increased to about $2.08 million or 185% compared to the same period in 2006, resulting in $0.08 per fully diluted share.

During the nine month period ended Sept. 30, 2007, AgFeed's revenues increased 283% to about $23.8 million and gross profit increased to about $6.8 million or 189% compared to the same period in 2006. The company's net income increased to approximately $4.3 million, up about 246% compared to the same period in 2006, resulting in $0.17 per fully diluted share.

Due to rising popularity in the Chinese diet, higher disposable incomes, strong profitability in the pork sector and increased investment in swine and pork operations, AgFeed says that industry experts predict the pork and related feed market to experience double-digit growth through 2015.

In addition to their premix animal feed, the company is also exploring future opportunities in the commercial hog-raising business.

“This new business could become a natural vertical integration strategy and complement our current business as China raises over 500 million hogs annually and prices are at historical highs largely due to rising consumer income,” said Songyan Li, PhD, chairman of AgFeed, in a press release. “Management intends to enter this new business model through mergers and acquisitions as well as building new hog farms. We believe the commercial hog farm business could contribute significant revenues to our financial performance in 2008 and beyond.”

Tack that onto the fact that AgFeed benefits from an income tax-free environment, and investors may have a strong chance of bringing home the bacon.

Note: AgFeed Industries (OTCBB: FEED) is on the “Watch List” of Rising Star Stocks, a subscription investment newsletter from Business Financial Publishing, which also publishes SmallCapInvestor.com. As a Watch List company, AgFeed displays many characteristics found in successful stock winners, and is being closely monitored for possible inclusion in the Rising Star Stocks portfolio at a later date.

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