Agrium Should Benefit From Bold Move In Potash, Dividend Boost

Dec.14.11 | About: Agrium Inc. (AGU)

Agrium’s (NYSE:AGU) management made a bold move today by announcing it will invest $1.5B to grow its potash production by 50% by 2014 and quadrupling its dividend immediately. This is huge vote of confidence in Agrium’s future, and I think it could be a substantial catalyst to move this undervalued stock in the coming months.

“Agrium Inc., together with its subsidiaries, produces and markets agricultural nutrients, industrial products, and specialty products worldwide, as well as involves in the retail supply of agricultural products and services in North and South Americas and Australia.” (Business description from Yahoo Finance)

7 reasons Agrium is a great bargain at $65 a share:

  1. AGU is selling near the bottom of its five year valuation range based on P/E, P/B, P/S and P/CF.
  2. Agrium has grown earnings by an average of 16% a year over the last five years, although earnings tend to volatile on a short-term horizon. This announced expansion of capacity should ensure this long-term earnings growth continues.
  3. The stock is going for less than 7 times forward earnings, which is a 35% discount to its five year average.
  4. AGU appears to be starting to be building a short-term technical base at the $65 level (see chart):
  5. Click to enlargeThe stock is way under analysts’ price target. Credit Suisse has a $99 price target on Agrium, and the median analysts’ price target of $98 is 50% above current levels.
  6. Analysts’ ratings are going the right way on the stock. Both Stifel Nicolaus and RBC Capital Markets upgraded the stock to a buy in late October.
  7. The headwind of tax loss selling should dissipate shortly, and the company is wonderfully positioned to ride the long-term secular trend of increased food demand in the developing world.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AGU over the next 72 hours.