Agrium - A Top Pick In Agriculture

Mar.12.13 | About: Agrium Inc. (AGU)

Agrium, Inc. (NYSE:AGU) is a retail supplier of agricultural products and services in North America, South America, and Australia. It produces and markets agricultural nutrients and industrial products with exposure to potash, phosphate, and nitrogen. The company produces and markets agriculture products to both wholesale and retail customers.

The company has three main reporting segments: retail, wholesale, and advanced technologies. The retail segment accounted for 69% of Agrium's 2012 total sales, whereas 28% of the remaining 31% was contributed by the wholesale segment. The crop protection products and crop nutrients provide the majority of revenue in the retail segment, whereas nitrogen accounts for the majority of wholesale segment revenue.

Investment Case

We have a buy rating on Agrium. We believe AGU offers diversification through its production of the three major nutrients and will benefit, in particular, from its high leverage to nitrogen fertilizer sales. The company's retail segment provides a lever for increasing profitability and steady growth via acquisitions. With competitive assets in nitrogen, potash, phosphate, and retail, Agrium offers investors exposure to both the retail and the wholesale businesses. The company expects to grow the wholesale business through brownfield and the retail business through internal growth and acquisitions.

Potash Outlook Improves, Nitrogen Remains Strong

As historically tight global grain and oilseed supplies are supporting increased acreage and cash crop economies, the Calgary-based fertilizer producer remains bullish on fertilizer demand and crop production. As both India and China have settled contracts now, potash demand is expected to improve in Q2 2013, which should result in rebound in prices in the second half of 2013. On the other hand, the continued uncertainty in the nitrogen market will continue to support high nitrogen prices. AGU is well positioned to benefit from both the potash and nitrogen demand.

Agrium Continues to Report Strong Results

The Canadian fertilizer company recently reported Q4 adjusted EPS of $2.16, beating consensus estimates of $2.0 by 8%. Net earnings for the company jumped to $354 million, or $2.34 per share, from $193 million, or $1.20 per share in 2011. Sales for the last quarter rose 3% to $3.26 billion. According to Thomson Reuters, analysts on average expected Agrium to earn $2.00 a share on sales of $3.2 billion.

Results continue to be mixed in the wholesale segment as weakness in phosphate and potash results - due to lower international sales volume and pricing - once again offset record nitrogen results. Despite pockets of weakness in the wholesale segment, Q4 2012 earnings and sales were still the second highest on record. On the other hand, large winter crops and favorable weather conditions resulted in record results in the retail business.

Total potash sales of 341,000 tons represents a significant improvement over Q3 volumes of 160,000 tons. The company saw a significant shift upward in sales to North America, increasing 44% year-over-year to 255,000 tons. Sales, as expected, were impacted during the quarter due to the lack of Indian and Chinese contracts. However, since both countries have signed new contracts, Q2 2013 and particularly the second half of 2013 are looking much better.

The nitrogen operations reported the best results of all. The division reported better-than-expected and record results for the fourth quarter. Sales of 1.1 million tons increased 6% year-over-year, as strong domestic and international urea demand offset lower ammonia sales in Western Canada resulting from earlier snowfall.


AGU has a dividend yield of 1.9%. In comparison, Mosaic (NYSE:MOS) has a dividend yield of 1.7%, CF Industries (NYSE:CF) a yield of 0.8%, Potash Corporation of Saskatchewan (NYSE:POT) a yield of 2.8%, and Intrepid Potash (NYSE:IPI) a yield of 0%.

AGU has an excellent history of dividend and dividend increases. The company pays its dividend quarterly. The board of directors announced late last month that it has approved a dividend of $0.50 per common share to be paid on April 18, 2013, to shareholders of record on March 28, 2013. In the last two years alone the company has raised its dividend from 6 cents to 50 cents, an increase of 733%. Additionally, on Oct. 22, 2012, Agrium announced its intention to double the dividend to $2.00 per share on an annualized basis and move to a quarterly payment schedule (50 cents per quarter) as of January 2013.


AGU is also trading at an attractive valuation. The company has a price/earnings ratio of 11.1, compared to 16.9, 14.0, 16.6, and 14.0 for POT, MOS, IPI, and the industry average, respectively. The company has a forward P/E of 10.4 and a PEG Ratio of 0.3. AGU is also trading at a lower price-to-sales ratio than POT, MOS, and IPI. Agrium has a price-to-book ratio of 2.3 compared to 3.5 for POT and 3.3 for the industry.

AGU also has a decent balance sheet. The company generated $2.1 billion in operating cash flow in 2012, the highest in the company's history. Agrium has debt-to-equity ratio of 31% compared to 37% for the industry and 35% for POT. AGU's EBITDA/interest ratio of 19.14 is also better than the industry average of 12.85.

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AGU has a solid retail business with steady margins while its wholesale fertilizer business benefits from increased planted acres of key crops. Now, when both India and China have settled contracts, there is less uncertainty in the fertilizer market and we think AGU is best positioned to benefit due to both its retail and wholesale exposure. AGU should also benefit from intermediate-term improvements in potash markets and its strategic advantage within the North American nitrogen market, further driving profitability and subsequent outperformance.

Agrium's Chief Executive Officer Mike Wilson said at a recent BMO Capital Markets investor conference in Florida that the company expects to close its purchase of Viterra farm retail stores from Glencore by the end of Q2 2013. The company is waiting for approval from Canada's Competition Bureau, and if approved it will make Agrium the biggest retail seller of products like seed, chemicals, and fertilizer to Canadian farmers.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.