On Tuesday, Canadian agricultural giant Agrium (AGU) reiterated its outlook for earnings per share for the first half of 2012 near the high-end of its previously-issued guidance range of $5.50-$6.10. Driving this positive revision is the firm's performance during the second quarter, where it expects earnings per share to be as much as $4.78. CEO Mike Wilson cited strong grain prices and tight nutrient supply as the main driver behind strong earnings. We're sticking with our fair value estimate for the firm.
As with most commodities, potash, nitrogen, and phosphate are all highly susceptible to boom and bust cycles. In part due to new supply coming online and higher agricultural yields, potash prices have fallen from their high in July of 2011, but prices appear to be stabilizing. Though the share prices of Agrium, Potash (POT), and Mosaic (MOS) are all down over the past 12 months, we think such stabilization bodes well for the nutrient input sectors. UREA prices, which are very important to Agrium and CF Industries (CF), have actually rallied off of their December 2011 lows of $350 to nearly $500 per metric ton.
The long-term story behind agriculture is fairly bullish; as land becomes scarcer, it needs to become more productive to feed a global population that could exceed 9 billion people by 2050. This bodes well for the value of farmland, fertilizers, and genetically modified-seed companies like Monsanto (MON) and DuPont (DD).
Still, most of the agricultural commodity sector trades roughly in line with their respective commodity prices. As a result, we'd demand a large margin of safety before investing in any agricultural-chemical industry constituent. Specifically, for most firms in the industry, we'd look for an entry point below the lower end of our fair value range and only on improving technical and momentum indicators, supported by stable or improving underlying commodity prices at that particular time. This is strict criteria, but we'd like to limit our downside, while maximizing upside potential, which remains consistent with our stock-selection methodology.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.