Buy, Sell, or Hold: Yongye International?

It's a rather tempting combination: a company that specializes in plant and animal food in a world with growing food needs -- and it's based in China, too. Here's another tidbit: Its price-to-earnings (P/E) ratio is just 2.5.

But should you buy, sell, or hold Yongye International (NAS: YONG) ? Let's see.

Buy
The company has recently been posting strong revenue and earnings growth, and its profit margins and return on equity have been rising. Its area of operations is attractive, too. The world's growing population will require more and more food, and, as the old saying goes, they're not making more land. Farmers are more interested than ever in maximizing the productivity of their property, and fertilizers are in high demand.

Yongye is making some smart moves, too, such as sourcing raw materials from its own facilities in order to lower its costs of production. It's also boosting its capacity with new facilities and targeting new markets in China's many rural regions.

Meanwhile, Morgan Stanley, after digging deeply into the company, invested $50 million in it and has been snapping up additional shares.

Sell
All is not perfect, though. As my colleague Rich Smith has noted, while Yongye's recent growth has been very strong, partly due to higher crop prices, its peers have been posting similar gains. Thus, Yongye is not standing out as much as we might assume. Terra Nitrogen (NYS: TNH) has been growing its revenue and earnings by double digits recently.

Those peers and competitors aren't standing still, either. Some are small, but heavy hitters such as Monsanto  (NYS: MON) and Dow Chemical  (NYS: DOW) are aiming to boost their penetration into China

In addition, Yongye's free cash flow has recently dried up, and it's always better for a company to be generating free cash flow instead of burning through cash.

Then there's China. It's a double-edged sword. On the one hand, the enormous growing population and developing economy is a tantalizing market. On the other hand, its social and economic environment is not as free as ours. Sudden new regulations can spell trouble for companies there, and also for their foreign investors. There have also been allegations of fraud against some Chinese companies recently, and that remains a risk. China Green Agriculture  (NYS: CGA) is another small China-based fertilizer specialist that has been under a cloud of uncertainty due to worried investors -- despite posting very strong numbers recently.

Finally, remember that $50 million Morgan Stanley invested? Well, those preferred shares can convert to stock at $8.80 per share, and that can dilute the value of existing shares.

Hold
It's a tough call, as there are valid reasons to buy and sell this company. That's why you might want to just hold on to your shares, or hold off on buying for a while. My colleague Dan Caplinger suggests giving Yongye and others like it some time to further prove themselves.

The verdict
I fall in the "hold" camp. It's a very intriguing company, but I'm not ready to jump in quite yet. (I have parked some money in Terra Nitrogen, mainly for its massive dividend.) Still, Yongye is worth watching, and you can do that by adding Yongye to your watchlist at the Fool, so that we can easily update you on its happenings.

If you'd like to find an emerging-market stock you can feel more secure about, we've got one for you. It's our pick for the top stock for 2012.

At the time this article was published Longtime Fool contributor Selena Maranjian owns shares of Terra Nitrogen and China Green Agriculture, but she holds no other position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of Yongye International. Motley Fool newsletter services have recommended buying shares of Yongye International and China Green Agriculture. Motley Fool newsletter services have recommended creating a synthetic long position in Monsanto. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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theinvestor22

Free cash flow has been an issue over the years for Yongye because it was in hyper-growth mode. It has been trending better lately, however. Free cash flow was actually positive for Q3, which was unusual given the typically heavy need for cash during the growing season. Overall, free cash flow should be quite positive for fiscal 2011, because of the usually large cash collection during the winter months. Thankfully, with all the cash coming home to roost, the company shouldn't need any more financings to continue growth of existing products.

January 23 2012 at 11:31 AM Report abuse rate up rate down Reply