Mehmet Sahin

mehmetsahinn@gmail.com

Research Report
AMERICAN VANGUARD CORPORATION

Founded in 1969, American Vanguard Corporation is a diversified specialty

and agricultural products company focusing on crop protection, turf and

ornamental management, and public and animal health. The Company has

continued its successful strategy of acquiring or licensing both new and

well established product lines that serve numerous high valued market

niches. Through skillful marketing, aggressive product registration activities,

quality manufacturing, and international expansion, American Vanguard has

positioned itself to capitalize on developing trends in global agriculture.

RECENT STATISTICS (As 11/27/2010)

Recent Price 6.94

PE Ratio 52.8

Dividend Yield 0.60%

EPS 0.13

Dividends 0.02

Price to book 1.16

RECOMMENDATION

• Recommendation SELL

• Company is not in a good shape

• High debt Ratio (not growing enough to justify its debt)

• High P/E Ratio

• ROE and ROA values are low

• Affected by 2009 and has a (– ) revenue

 • Has a small market Capital with respect to its competitors

• Bigger firms can easily buy or eliminate them

• Positive aspect: Liquid

• Affected by the global crisis in terms of numbers and efficiency (– ) revenue

• Not Good especially for Short Term investment

FINANCIAL STABILITY

Current Ratio

Current Assets for 2009 = 254.71M

Current Liabilities = 101.62M

Current Ratio = 254.71/ 101.62 = 2.50

Quick Ratio

254.71-72.51M / 101.62 = 1.79

Interest Coverage

Interest Coverage is calculated as = 5.87% for the company.

Debt Percentage
Long Term Debt = 45.43M

Shareholders Equity = 153.09M

= 45.43/153.09 = 29%

Equity Ratio = Owners Equity/Total Assets

Equity Ratio

Equity Ratio = Owners Equity/Total Assets

153.09M /254.71M = 0.61

Short Term Debt

2005 2006 2007 2008 2009

Current Portion of Long Term Debt 8.11M 4.11M 4.11M 6.66M 8.53M

Modern Portfolio Theory

Risk Free Rate

The theoretical rate of return of an investment with zero risk. The risk-free rate represents the
interest an investor would expect from an absolutely risk-free investment over a specified period
of time. The papers issued by U.S usually considered as risk- free.

Current 10 year bond is 2.94

The inflation rate is 1.17

The Market return for S&P over the years is considered as 6-8 percent

Beta is the calculated to understand how volatile the stock is. But in order to have a better
opinion we should compare it with its competitors and industry.

Company Industry Sector S&P 500

0.31 1.07 1.38 1.28

Profitability
Profit Margin

Net profit margin for AVD = 5.29%

Profit Margin over Years

Operating Margin

Operating income for 2009 = - 6.33

Net sales = 209.33

Operating Margin is = – 3%

But the 5 year avg. operating margin is = 12.16

ROE Du Pont Model

The financial analysis is carried out using DuPont System of analysis and some others pertinent
ratios. DuPont analysis examines a company’s Return on Equity (ROE) by splitting it into three
main elements:

Financial leverage

Asset use efficiency

Profitability

  2009
 net -5.9/209.33
income/sale
s =-0.02

209.33/254.7
1

sales/assets =0.82

254.71 /
153.09
assets/equit
y =1.66

Return on Total Capital

ROTC = (net income + interest expense) / average total capital

Cost Of Equity

For determining cost of equity

Dividend Capitalization Model

Or

Capital Asset Pricing Model can be used which is;

-According to DCM;

Dividends per share = 0.02

Current Market Value of stock = 6.95

If we require 8% percent of return (which is closely the market return)

6.95*8/100 = 0.55 (return we expect from a stock) we already have 0.02 from the dividends. So
the cost of Equity is 0.53 per stock. 0.53/ 6.95 = 7.6%

-According to Capital Asset Pricing Model

Rf = considering 10 year U.S bond = 2.95 %

Beta of the security is = 0.31

Expected market return is 8 % so

Cost of the equity is = 4.55 %

Revenue Growth

2000 2001 2002 2003 2004

Revenue 74.52M 83.13M 100.67M 124.86M 150.85M

2005 2006 2007 2008 2009

Revenue 189.80M 193.77M 216.66M 237.54M 209.33M

If we calculate the Compound annual Growth Rate for Sales which is;

For 10 years

{(209.33 /74.52) ^ 0.1} -1 = 10 % annually

For the ten year period company did good in earnings.

For 5 Years

{(209.33 /189.80)^ 0.2} -1 = 2% annually

For 5 year period company has just increased 2 percent annually

For 3 years

{(209.33/ 216.66) ^ 0.33) = - 0.1

For 3 years company has decreased in its earnings.

Net Income Growth

2000 2001 2002 2003 2004

Net Income 4.31M 5.64M 7.05M 10.26M 14.48M
2005 2006 2007 2008 2009
Net Income 19.00M 15.45M 18.73M 20.02M -5.79M

To have a better observation I will use periods 2000-2008

For 8 years

(20.02/4.31)^0.125 – 1 = 21%

For 5 years

{(20.02 / 10.26) ^ 0.2} -1 = 14%

For 3 years

(20.02 – 19.00) ^ 0.33} – 1 = 1.7 %

Operating Statistics

Earnings per Share

= 0.13 $

AVD Earnings per Share Rankings

Overall 47th percentile 2470 of 4713

Sector 50th percentile 250 of 501 in Basic Materials

Industry 40th percentile 9 of 15 in Agricultural Chemicals

Dividends per Share

Dividends per share = $ 0.2

AVD Dividend Rankings

Overall 65th percentile 1815 of 5205

Sector 64th percentile 185 of 524 in Basic Materials

Industr
y 53rd percentile 7 of 15 in Agricultural Chemicals

Book Value per share

Book Value per Share: $5.90

AVD Book Value per Share Rankings

Overall 35th percentile 2481 of 3835

Sector 32nd percentile 251 of 371 in Basic Materials

Industry 18th percentile 9 of 11 in Agricultural Chemicals

Valuation

A publicly traded firm potentially has an infinite life. The value is

therefore the present value of cash flows forever.

Since we cannot estimate cash flows forever, we estimate cash flows

for a “growth period” and then estimate a terminal value, to capture the

value at the end of the period:

Cash Flow - Operations 2005 2006 2007 2008 2009

Depreciation, Depletion, Amortization 7.02M 6.67M 10.09M 11.61M 13.49M

Other Non-Cash Items 0.24M 1.12M 1.78M 4.70M 0.45M

Total Non-Cash Items 7.26M 7.80M 11.87M 16.31M 13.93M

Deferred Income Taxes -3.58M

Total Changes in Assets/Liabilities -7.45M -55.00M 22.56M -35.44M 23.81M

Other Operating Activities

Net Cash from Operating Activities 18.82M -31.76M 53.16M 0.88M 31.95M

Cash Flow - Financing

Debt Issued 17.89M 55.39M -39.61M 24.14M -28.44M

Equity Issued 1.01M 23.88M 0.97M 1.15M 1.47M

Dividends Paid -1.55M -2.16M -1.84M -2.13M -1.61M

Other Financing Activities 0.23M

Net Cash from Financing Activities 17.36M 77.34M -40.48M 23.16M -28.59M

Foreign Exchange Effects 0.01M 0.05M 0.21M -1.14M 0.11M

Net Change in Cash & Cash 0.89M 0.50M 1.36M -1.97M -0.85M
Equivalents

Cash at beginning of period 0.46M 1.34M 1.84M 3.20M 1.23M

Cash at end of period 1.34M 1.84M 3.20M 1.23M 0.38M

P/E

n/a for the last year.

P/E High - Last 5 Yrs. 34.61 2.18 0.56 20.08

P/E Low - Last 5 Yrs. 12.53 0.16 0.06 4.99

Price to Book Value

Price to Book Value: 1.19

AVD Price to Book Value Rankings

Overall 65th percentile 1518 of 4443

Sector 79th percentile 94 of 466 in Basic Materials

Industry 86th percentile 2 of 15 in Agricultural Chemicals

Pricing

Expected Return = (Dividends Paid + Capital Gain) / Price of Stock

We expect a 8% gain,
Dividends paid = 0.02

Expected Return =(0.02 + 0.56) / 7 = 10%

For 5 years

Stock Price = 7* (1.08)^ 5 = 10.28

The expected return is 10% 1.10^5 = 1.61

Expected Price is = 10.28 / 1.61 = 6.38

INDUSTRY ANALYSIS

In Agricultural Chemicals industry American Vanguard has giant competitors such as Potash
Corporation, Monsanto Corporation, and the Mosaic Company.

The Companies in Chemical Industry by market capital;

Company Market Cap Revenues

Potash Corporation of Saskatchewan $41.20B $1.57B
Monsanto Company $32.97B $1.95B
The Mosaic Company $30.44B $2.19B
Syngenta $27.52B
Agrium $12.77B $2.01B
CF Industries Holdings $8.65B $917.10M
The Scotts Miracle-Gro Company $3.40B $475.70M
Compass Minerals International $2.89B $176.00M
Intrepid Potash $2.39B $91.47M
Terra Nitrogen $1.84B $136.00M
Rentech $297.58M $49.78M
China Agritech $235.32M $23.89M
China Green Agriculture $226.35M
American Vanguard $191.86M $68.26M
Converted Organics $16.19M $0.81M
New Oriental Energy And Chemical $13.39M $3.19M

Some Valuation data about firms in the industry

Earning Yield and PE Ratio

Company Earning Yield PE Ratio

Converted Organics -236.84%
New Oriental Energy And Chemical -78.95%
Rentech -12.32%
American Vanguard -0.85%
Syngenta
Intrepid Potash 1.44% 69.28
 China Agritech 2.29% 43.58
CF Industries Holdings 2.59% 38.64
Monsanto Company 3.30% 30.35
The Mosaic Company 3.35% 29.83
Potash Corporation of Saskatchewan 3.70% 27.03
Agrium 4.58% 21.81
Compass Minerals International 5.18% 19.32
The Scotts Miracle-Gro Company 5.95% 16.81
Terra Nitrogen 6.66% 15.01
China Green Agriculture 11.51% 8.69

Price and Price to book Value

Company Price Price to Book

Value
Potash Corporation of Saskatchewan $138.91 5.25
CF Industries Holdings $121.71 2.01
Terra Nitrogen $99.36 10.25
Compass Minerals International $88.27 10.13
Agrium $81.15 2.49
The Mosaic Company $68.32 3.36
Monsanto Company $61.00 3.25
Syngenta $58.19 4.07
The Scotts Miracle-Gro Company $50.77 4.45
Intrepid Potash $31.87 3.24
China Agritech $11.33 1.64
China Green Agriculture $8.43
American Vanguard $7.01 1.19
Rentech $1.38 6.47
New Oriental Energy And Chemical $0.95 7.61
Converted Organics $0.38 -0.91

Revenue Growth and Retained Earnings Growth

Company Revenue Retained

Growth Earnings
Growth
New Oriental Energy And Chemical -57.79% -1717.54%
Rentech -46.67% -19.99%
 China Agritech -11.66% 32.27%
The Scotts Miracle-Gro Company -8.96% 48.03%
Compass Minerals International -3.46% 75.22%
China Green Agriculture
Syngenta -14.75%
American Vanguard 2.84% -1.90%
Monsanto Company 3.94% 19.61%
Agrium 8.95%
Converted Organics 16.50% -100.23%
Terra Nitrogen 33.93%
Intrepid Potash 37.66% 23.03%
Potash Corporation of Saskatchewan 43.30% 45.40%
The Mosaic Company 50.17% 6.11%
CF Industries Holdings 113.23% 17.57%

Profit Margin & ROE

Company Profit Margin Return on

Equity
Converted Organics -2710.17% 520.03%
New Oriental Energy And Chemical -22.08% -1515.97%
Monsanto Company -7.32% 10.68%
The Scotts Miracle-Gro Company -6.85% 25.52%
Rentech -3.37% -86.03%
China Green Agriculture 37.12%
Syngenta
Agrium 2.84% 11.53%
CF Industries Holdings 5.26% 4.71%
American Vanguard 5.29% -0.94%
China Agritech 7.67% 7.17%
Compass Minerals International 10.97% 55.22%
Intrepid Potash 12.75% 4.62%
The Mosaic Company 13.60% 11.50%
Potash Corporation of Saskatchewan 25.57% 21.74%
Terra Nitrogen 25.88% 80.45%

Current Ratio and debt to Equity Ratio

 Company Current Ratio Debt to Equity
Ratio
China Agritech 23.09 0.04
Intrepid Potash 4.24 0.10
Compass Minerals International 3.58 2.51
The Mosaic Company 3.45 0.44
Agrium 2.39 0.91
American Vanguard 2.13 0.75
Syngenta 2.13 1.44
Terra Nitrogen 2.03 0.41
Monsanto Company 2.01 0.76
CF Industries Holdings 1.65 1.00
The Scotts Miracle-Gro Company 1.43 1.83
Rentech 1.27 2.96
Potash Corporation of Saskatchewan 0.90 0.85
Converted Organics 0.53
Porter Analysis

Threat of New Entry

- This is not a big treat because government applies lots of regulations.

- Since chemicals involved, many regulations must be satisfied therefore this is not a
threat.

Supplier Power
 - There are limited suppliers and most of them are internationals. This is a major threat for
the industry

Buyer Power

- There will be always buyers for the company. As population grows number of customers
will increase, not a threat

Threat Of Substitution

- This is not a threat because chemicals are being used in agriculture and there is no
alternative way to get desired results without using chemicals.

Competitive Rivalry

- As we observe there are giant firms in the sector. American Vanguard is a small
company comparing them. This is a big threat for the company because its competitors’
are financially very strong.

INCOME STATEMENT

Income 2005 2006 2007 2008 2009

Revenue 189.80M 193.77 216.66M 237.54M 209.33M
M
Cost of Revenue 104.12M 111.41 120.93M 136.41M 148.90M
 M
Gross Profit 85.68M 82.36M 95.73M 101.13M 60.43M
Research & Development
Expense
Selling, General, & Admin.
Expense
Depreciation & Amortization
Operating Interest Expense
Other Operating Expenses -53.41M -53.14M -59.72M -64.99M -66.75M
Total Operating Expenses 157.53M 164.56 180.65M 201.39M 215.66M
M
Operating Income 32.27M 29.22M 36.01M 36.14M -6.33M
Non-Operating Income -1.33M -2.69M -5.49M -3.97M -3.21M
Pretax Income 30.94M 26.52M 30.53M 32.17M -9.54M
Provision for Income Taxes 11.94M 11.07M 11.80M 12.15M -3.75M
Income after Tax 19.00M 15.45M 18.73M 20.02M -5.79M
Minority Interest
Equity In Affiliates
Income Before Extraordinaries & 19.00M 15.45M 18.73M 20.02M -5.79M
Disc. Operations
Investment Gains/Losses
Other Income/Charges
Income from Discontinued
Operations
Net Income 19.00M 15.45M 18.73M 20.02M -5.79M
 
Earnings Per Share Data 2005 2006 2007 2008 2009
Average Shares to compute 25.76 27.19 27.44 27.47 27.12
diluted EPS
Average Shares used to compute 24.34 25.93 26.31 26.64 27.12
basic EPS
EPS - Basic net 0.78 0.60 0.71 0.75 -0.21
EPS - Diluted net 0.74 0.57 0.68 0.73 -0.21

BALANCE SHEET

Assets 2005 2006 2007 2008 2009

Cash & Short Term Investments 1.34M 1.84M 3.20M 1.23M 0.38M
Receivables 60.27M 75.74M 56.57M 51.97M 44.64M
Inventory 44.36M 66.63M 63.45M 90.63M 72.51M
Prepaid Expenses 0.85M 1.35M 2.21M 1.69M 2.14M
Other Current Assets
Total Current Assets 106.82M 145.57 125.44M 145.51M 119.68M
M
Gross Property, Plant & 73.09M 80.15M 73.30M 87.87M 92.19M
Equipment
Accumulated Depreciation 38.75M 43.50M 41.52M 46.63M 53.00M
Net Property, Plant & Equipment 34.34M 36.65M 31.78M 41.24M 39.20M
Long Term Investments
Goodwill & Intangibles 41.22M 79.03M 85.32M 91.08M 86.97M
Other Long Term Assets 0.64M 0.91M 6.04M 9.11M 8.87M
Total Long Term Assets 76.41M 116.81 123.14M 141.43M 135.03M
M
Total Assets 183.23M 262.38 248.58M 286.94M 254.71M
M
 
Liabilities 2005 2006 2007 2008 2009
Current Portion of Long Term 8.11M 4.11M 4.11M 6.66M 8.53M
Debt
Accounts Payable 28.39M 15.69M 13.80M 16.20M 11.40M
Accrued Expenses 26.82M 23.29M 30.55M 22.97M 30.95M
Deferred Revenues
Other Current Liabilities
Total Current Liabilities 65.15M 46.34M 50.30M 49.15M 50.88M
Total Long Term Debt 34.37M 93.76M 56.16M 75.75M 45.43M
Deferred Income Tax 1.26M 1.40M 2.39M 6.09M 5.12M
Minority Interest
Other Long Term Liabilities 0.19M
Total Long Term Liabilities 35.63M 95.16M 58.55M 81.84M 50.74M
Total Liabilities 100.78M 141.50 108.84M 130.99M 101.62M
M
 
Shareholder's Equity 2005 2006 2007 2008 2009
Common Shares Outstanding 24.39M 26.13M 26.42M 29.21M 29.58M
Preferred Stock
Common Stock, Net 2.66M 2.83M 2.87M 2.92M 2.96M
Additional Paid-in Capital 9.90M 34.82M 36.55M 38.87M 41.53M
Retained Earnings 72.83M 86.11M 103.00M 120.90M 113.50M
Treasury Stock 2.75M 2.75M 2.75M 3.15M 3.15M
Other Shareholder's Equity
Shareholder's Equity 82.45M 120.88 139.74M 155.94M 153.09M
M
Total Liabilities & Shareholder's 183.23M 262.38 248.58M 286.94M 254.71M
Equity M

CASH FLOW ANAYLISIS

Cash Flow - Operations 2005 2006 2007 2008 2009

Depreciation, Depletion, 7.02M 6.67M 10.09M 11.61M 13.49M
Amortization
Other Non-Cash Items 0.24M 1.12M 1.78M 4.70M 0.45M
Total Non-Cash Items 7.26M 7.80M 11.87M 16.31M 13.93M
Deferred Income Taxes -3.58M
Total Changes in Assets/Liabilities -7.45M -55.00M 22.56M -35.44M 23.81M
Other Operating Activities
Net Cash from Operating Activities 18.82M -31.76M 53.16M 0.88M 31.95M
 
Cash Flow - Financing
Debt Issued 17.89M 55.39M -39.61M 24.14M -28.44M
Equity Issued 1.01M 23.88M 0.97M 1.15M 1.47M
Dividends Paid -1.55M -2.16M -1.84M -2.13M -1.61M
Other Financing Activities 0.23M
Net Cash from Financing Activities 17.36M 77.34M -40.48M 23.16M -28.59M
 
Foreign Exchange Effects 0.01M 0.05M 0.21M -1.14M 0.11M
Net Change in Cash & Cash 0.89M 0.50M 1.36M -1.97M -0.85M
Equivalents
Cash at beginning of period 0.46M 1.34M 1.84M 3.20M 1.23M
Cash at end of period 1.34M 1.84M 3.20M 1.23M 0.38M