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Alliance Grain Traders: Stock's runup plants seed of caution

Under chief executive Murad Al-Katib, Alliance Grain Traders Inc. has expanded to become a food-products company.

Troy Fleece/The Globe and Mail

Investors in pulse processor Alliance Grain Traders Inc. are starting to wonder whether they can stomach too much of a good thing.

Shares in the Regina-based company have risen by about 50 per cent over the past year, enriched by robust lentil sales and an expanding global food business.

The stock has outpaced a number of other specialty food and agriculture companies, as well as the overall S&P/TSX composite index.

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The company, which buys, processes and distributes lentils, peas, beans and chickpeas for worldwide distribution, is expanding beyond the commodity export business to become a food-products company with canning and packaging divisions.

Investors appear to agree with the strategy. The shares are up by about 7 per cent since Alliance, led by CEO Murad Al-Katib, said last month it was buying ethnic food retailer and distributor CLIC International Inc. of Quebec.

Given the recent share runup, some analysts believe now might be a good time for investors to curb their appetite for Alliance.

On Tuesday, Raymond James analyst Steve Hansen downgraded the stock to "market perform," from "outperform," citing "strong share price appreciation."

Despite what he calls "stellar outperformance," including about a 28-per-cent surge in the past three months alone, he recommended investors wait for "an opportunistic pullback," before buying more.

He is one of three analysts who now have a "hold" or equivalent rating on the stock, while four recommend it as a "buy," according to S&P Capital IQ.

The analyst consensus price target for the next year is $18.83, according to Thomson Reuters.

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The stock closed at $18.90, down 2 per cent or 34¢ on the Toronto Stock Exchange Tuesday and has ranged from a high of $19.35 and low of $11.52 over the past 12 months. The shares were trading at $35 in early 2010, driven in part by strong prices for its commodities and input from new acquisitions. The shares tumbled over the next two years, however, after Alliance was hit by volatile credit markets that affected the international pulse trade.

Recovering prices and the company's diversification strategy have helped to boost the shares since. Investors also enjoy Alliance's 3-per-cent dividend yield.

CIBC World Markets analyst Jacob Bout increased his price target to $20 from $16 last month, but maintained a "sector performer" rating.

He's expecting the company to report strong fourth-quarter sales as a result of strong Canadian exports, higher lentil prices and increased capacity at some of its plants. A weaker Canadian dollar is also expected to boost the company's results, since its revenues are earned in U.S. dollars.

"Feed/food ingredients are the long-term opportunity for AGT," Mr. Bout said in a recent note, referring to the company's stock symbol.

Still, the company faces risks such as weather conditions, which can affect the size and quality of harvests of its key crops. Bottlenecks on railways and ports in Canada can also hinder timely shipping of the company's products.

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Alliance owns 12 processing plants in Canada, two in the United States, four in Australia and nine in Turkey; it also owns a distribution facility in China and another in South Africa.

Michael Sprung, president of Sprung Investment Management, is a believer in the stock and sees it rising into the mid-$20 range in the not too-distant future, "if one is patient with it."

His company owns the stock for its clients, seeing growth in the pulse sector alongside an expanding global population.

Mr. Sprung also likes the company's diversification into food products. "I think it's very natural for this company to want to go up the food chain. The margins are better than the strict commodity business that they are in," he says.

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