Last October, the Bank of Canada (BoC) abandoned its rate-hike bias due to concerns about the country’s persistent disinflation. Those fears seemed to be borne out by subsequent showings of Canada’s consumer price index (CPI), whose readings for each month of the fourth quarter either equaled economists’ gloomy predictions or were actually slightly worse.

But more recent results suggest that Canada’s inflation could finally be heating up. In January, the country’s CPI increased 0.3 percent month over month, exceeding the consensus forecast by a substantial two-tenths of a percentage point.

The core CPI, which excludes volatile components such as food and energy, rose 0.2 percent, beating expectations by a tenth of a point. On a year-over year basis, prices rose 1.5 percent.

And now with Statistics Canada’s release of the latest numbers, we can see that February’s results were even better on a trend basis, with the CPI climbing 0.8 percent month over month, two-tenths of a point better than projected.

Meanwhile, the core CPI rose 0.7 percent, also two-tenths of a point higher than forecast. On a year-over year basis, prices were up 1.1 percent. That’s a deceleration from January’s figure, though still a tenth of a point better than predicted.

These strong numbers make it increasingly unlikely that policymakers will lower short-term rates again. The central bank’s overnight rate has stood at 1 percent since late 2010, the longest such pause in its history.

The BoC’s primary mandate is to keep total CPI inflation at the 2 percent midpoint of a target range of 1 percent to 3 percent over the medium term.

Whenever inflation deviates from its 2 percent target, the bank adjusts the overnight rate with the hope of achieving the target within about two years, which is the time it typically takes for changes in monetary policy to flow through the economy. To that end, economists with CIBC World Markets expect inflation to be near the bank’s 2 percent target by year-end.

In response to the CPI as well as stronger-than-expected retail sales, the Canadian dollar rallied off its four-year low of USD0.8894, which it hit last Thursday. Since then, the loonie has climbed 0.8 percent, to USD0.8962. For those keeping score of its longer-term moves, the currency is down about 15.5 percent from this cycle’s high in mid-2011.

In fact, the loonie’s slide has likely been a key factor in shaking off the country’s disinflation, though a 1.4 percent increase in an alcohol, beverages and tobacco tax also contributed to the latest headline number.

Since most commodities are priced in US dollars, Canadians are now paying higher prices on natural gas and gasoline, as well as for some food products, many of which are imported.

While a lower exchange rate will be helpful to Canada’s export sector, some economists are worried that it could undermine business investment, since a significant amount of machinery and equipment is imported. In addition to achieving its inflation mandate, the BoC also hopes a weak Canadian dollar will spur exports and boost business investment.

Although private-sector economists believe Canada’s economy will grow by 2.2 percent this year, much of that growth will occur during the second half. Despite some of the rosier economic data that have been released recently, a colder-than-normal winter is expected to weigh heavily on first-quarter gross domestic product (GDP).

The consensus forecast is for GDP to grow just 1.6 percent during the first quarter, which would be the slowest pace since late 2012. Of course, numerous economic data have had stronger-than-expected showings this winter, so it’s still entirely possible that the broad economy could deliver its own upside surprise for the first quarter.

Portfolio Update

Ag Growth International Inc (TSX: AFN, OTC: AGGZF) is a leading manufacturer of portable and stationary grain handling, storage and conditioning equipment. The company has 11 manufacturing facilities in Canada, the US, the United Kingdom and Finland, and distributes its products globally.

For the fourth quarter, Ag Growth’s trade sales grew 47 percent, to CAD88 million, versus the year-ago period, while adjusted EBITDA (earnings before interest, taxation, depreciation and amortization) jumped 194 percent to CAD13.9 million.

For full-year 2013, the company’s trade sales rose 14 percent year over year, to CAD358.3 million, while adjusted EBITDA increased 24 percent, to CAD61.2 million. Both figures were at all-time highs thanks to record North American crop production volumes and a prolonged US harvest. The second half was considerably stronger than the first half, during which the company continued to suffer the effects of depressed demand due to the prior year’s drought.

Additionally, the company continues to expand successfully into international markets, particularly in fast-growing emerging markets in South America and the Asia-Pacific region. In 2013, the company’s offshore sales were up 29 percent, to CAD92.5 million, accounting for nearly 26 percent of trade sales.

A substantial portion of these sales–about CAD57 million–occurred in Russia, Ukraine, and Kazakhstan, with Ukraine accounting for a significant majority. The company’s accounts receivable in the region total CAD17 million, which management believes it will still be able to collect, though it noted that 90 percent of this amount is insured by Export Development Canada, the government’s export credit agency. The company has no physical assets in the region.

Ag Growth says its customers in Ukraine are predominantly well capitalized and have not indicated any adjustments to their capital expenditure plans as of yet, though obviously this could change as the situation there continues to evolve.

In preparation for the upcoming North American harvest season, management notes that the number of corn acres planted in the US are expected to decline 3.6 percent from last year, while soybean acres are forecast to increase by 3.9 percent.

With dealer inventories depleted following last year’s harvest, management says the company entered 2014 with a record backlog of orders for both its portable handling and commercial equipment. While it’s too soon to know how the harvest will unfold, both of these details augur well for the coming year.  

Although the company missed expectations for fourth-quarter earnings per share by 89.7 percent, it exceeded revenue estimates by 7.5 percent, the second consecutive quarter in which it soundly beat sales projections.

On Bay Street, the mix of analyst sentiment remained unchanged despite the earnings disappointment. The stock currently has seven “buys,” three “holds,” and one “sell.”

However, the consensus 12-month target price improved to CAD49.85, up 3.4 percent from CAD48.19, which was the consensus in the several days immediately preceding Ag Growth’s earnings release. The new target price suggests potential appreciation of 7.3 percent above the current share price.

For full-year 2014, analysts forecast sales will grow by 14 percent, to CAD407 million, while adjusted earnings per share are expected to jump 71 percent, to CAD3.00. Meanwhile, EBITDA is projected to grow 23 percent, to CAD74.8 million.

The company’s growth next year is expected to occur at a more moderate pace, with sales forecast to climb 7 percent, to CAD437.4 million, while adjusted earnings per share are projected to increase by 9 percent, to CAD3.28.

After hitting a closing low of CAD30.14 in early May 2013, the company finally started shaking off the effects of the record drought that rocked its North American customers, and its shares have since risen 54.2 percent, near CAD46.47 (at time of writing).

Ag Growth pays a monthly dividend of CAD0.20, or CAD2.40 annualized, and its shares currently yield 5.2 percent. The company’s payout has been level since late 2010. Ag Growth’s financial rebound also led to a huge improvement in the firm’s payout ratio (based on funds from operations, or FFO), which was 57 percent in 2013 versus 93 percent the prior year.

At year-end, the CAD607 million company had CAD217.8 million in total debt on its balance sheet and CAD108.7 million in cash and cash equivalents. Ag Growth has CAD25 million in debt coming due toward the end of 2016 and another CAD86 million maturing at the end of 2018.

In early January, Ag Growth announced a rebranding initiative that would be launched across its entire product portfolio to create a unified family of brands. The goal of this effort is to increase awareness of the parent company while maintaining the distinction and value of the firm’s 14 individual brands. To that end, Ag Growth’s signature icon will now be contained within each brand’s logo so that customers have a greater realization of the breadth and depth of the company’s offerings.

In early February, Ag Growth entered into an agreement to acquire the REM GrainVac product line from Saskatchewan-based REM Enterprises Inc. REM has been a market leader in the grain vacuum industry for 40 years, and the pending deal dovetails with Ag Growth’s strategy of acquiring top brands to complement its existing business.

Grain vacuums are used to transfer grain between bins or storage sheds and trucks, as well as for cleanup. Ag Growth will now handle the manufacturing and sale of REM’s grain vacuums, which are sold throughout North America as well as internationally. The financial terms of the transaction are undisclosed.

Ag Growth is a buy below USD40 in the Aggressive Portfolio.