Agrium: The Next Generation

Since my last report back in October 2007, when I highly touted and recommended agricultural equities, particularly Agrium (AGU), my fundamental point of view on this trend has not changed:“The word needs food."

The basis of my previous points in that article were to come to a new reality and realization that the “West” is not the only place that will have its steak (it has been for a long time); the people in new developing economies and countries are demanding lifestyle changes in the form of better living conditions, enjoyment of life, and the need for better food (it is not just the basic needs anymore - standards are continuing to adjust as the growth of the middle class outstrips supply).  

These observations and beliefs bring me to Agrium (AGU), which I previously stated (in the October article) would experience unprecedented demand and growth, along with the other fertilizer equities. 

In my opinion the growth and demand that is being driven is in no way a “bubble” as some have propagated in hopes of popularizing themselves as “today's Nostradomises." Some of these bubble theorists, or so called analysts, have been speculating bubbles for many years in these plays (one such foolish analyst, at a financial institution in Canada had been negative on Potash (POT) since it was at an adjusted price of about $30; imagine if you took their advice - you would have missed at least a 700 % upside, plus, what I believe is to come over the next several years), many in the bubble camp have never properly analyzed the middle class trends and demands being incurred in places such as China, India, Russia and South America, not including the rest of the industrialized world that is in need of resources to build strong economies. They simply are looking at charts and guessing at certain points, in hopes of being the first to call “their” so called top in these equities (these are perhaps calculated MBA superstars) .

The fundamental basis when building strong economies is that people work harder to maintain and develop a new level in their standards; the spin-off to the growth of the middle class is the enjoyment of the benefits for their effort, particularly their habits and necessities around the food they consume. 

Specifically on Agrium: the company’s growth will be very positive for the next several years (as they recently indicated); the demand for fertilizer products is unprecedented today and will continue to have further growth and demand within the industry, with prices escalating due to the continued absorption and pressures from growing nations, as mentioned above.

My previous target on Agrium was that it would see $100 within 6-18 months. I now, based on research and my own opinion, as well as recent confirmations in growth, have to upgrade my longer term target; some may see this new adjustment as excessive and unjustified, but my basis is directed towards the logic of supply/demand, pricing power, as well as the recent integration of the retail operations in the United States (which Agrium has previously stated will have a definitive positive effect on earnings/cash flow going forward).

My new target on AGU (Agrium) is being set to reflect a supply/demand scenario for the industry as well as pricing power on several fronts, specific to AGU, as well as new drivers, particularly seed products that will potentially enhance their products and expand their portfolios; the new 12 month target is set at $160 (though aggressive for some, I believe this price will be realized and possibly exceeded. I am not going to get into the specifics around PE/Cash Flow ratios at this point, even though my basis and target has encompassed and been evaluated based on the potential PE and Cash Flow multiples, as well as current and future prospects for growth and sustainability). 

There are always going to be some form of price shocks in all types of markets; the ultimate difference separating prosperous and growing nations from stagnate nations will be how these occurrences are integrated and absorbed into the economies. The low price environment for staples and possible other goods in some first world nations will be gone forever (my opinion). I believe we will have various ups and downs in market prices, though I think the lifestyle (when it comes to prices for staples) has been forever changed, and will continue to change/adapt as the population and developing nations grow. 

Disclosure: I am definitely long and will continue to purchase AGU on an ongoing basis (dips, occurrences).

 

Comments

[sliman:]

Take a look at YARIY, Yara international. One of the biggest international fertilizer companies and trades at a low p/e. I am long AGU, POT, YARIY and MOO. Ag is where the growth is.

2008 Jun 17 04:21 AM

[Bear Stocks...:]

Also check out MOS, POT, CF and SQM in the same industry.
REXX, MEE, CLR and LNN are also looking good but are in different industries.

2008 Jun 17 10:30 AM