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By Fani Kelesidou

With a market cap of $16.50 billion, Canada-based Agrium Inc. (NYSE:AGU) is one of the largest agricultural retailers within the industry. Agrium has more than 1,250 retail centers in the U.S. and operates a diverse portfolio of agricultural products and services. The company produces and markets agricultural nutrients and industrial products, which include nitrogen, phosphate, potash, controlled-release fertilizers and micro nutrients. Agrium operates through three strategic business units, namely retail, wholesale and advanced technologies.

Overall, analysts are bullish about the fertilizer sector. The Midwest drought led to lower crop output during most of 2012. Thus, fertilizer demand for the next planting season is expected to rise rapidly. Investor sentiment is also positive on AGU, with nine out of fourteen analysts tracked by Morningstar giving it a "buy" rating.

Financials

Agrium has a strong financial position supported by five-year average sales growth of almost 30 percent. Based on the latest financial statement, Agrium experienced higher sales volumes in most of its major product lines. For Q2 2012, retail sales increased by 12 percent to approximately $5.2 billion compared to the same period in 2011. Advanced Technologies ("AAT") sales increased by 13 percent to $178 million. Wholesales sales at $1.7 billion were essentially unchanged from 2011.

The company's LT debt-to-equity ratio of 0.22 is perfectly manageable. For Q2 2012, net earnings from continuing operations totaled $860 million, up by 18 percent compared to the same period in 2011. Over the past five years, operating cash flow trends remained positive, resulting in an average cash flow stream of almost $1 billion.

The company reported a $19 million increase in expenses during the second quarter of 2012. However, this was partially offset by reduced environmental remediation and asset retirement obligation expenses. For the first half of 2012, consolidated gross profit was higher by $270 compared to the same period in 2011.

Competition

Some of the company's major competitors include Potash Corporation of Saskatchewan Inc. (POT), Monsanto (MON), and CF Industries Holdings, Inc. (CF).

AGU

CF

POT

MON

Market Cap

$16.50B

$26.23B

$34.87B

$47.27 B

Quarterly Revenue Growth % (YOY)

10.26%

-3.67%

3.05%

-6.10%

LT Debt-to-equity ratio

0.22

0.32

0.39

0.17

EPS

10.31

26.23

2.88

3.77

Gross Profit Margin

27.43%

51.03%

47.06%

52.12%

P/E

10.13

7.88

14.09

23.53

P/S

0.98

2.03

4.19

3.50

P/FCF

11.97

7.20

42.22

28.04

Data derived from finviz and morningstar

Fundamentally, AGU looks strong. It is evident from the table above that Agrium is ahead of its competitors in terms of revenue growth. Over the past three years, revenue grew by 15.5 percent, while the industry's average same rate stands at 4.9 percent.

Moreover, AGU's valuation metrics are way more attractive compared to its peers. Gross profit margin figures are a bit disappointing. However, Agrium's LT debt-to-equity ratio of 0.22 suggests an overall solid financial position. In addition, for the past five years, EPS grew by 97.62 percent, indicating that AGU can be considered as a profitable investment.

Stock Performance and Valuation Metrics

Agrium's valuation metrics and positive operational outlook make it an appealing investment. Currently, the stock is priced at around $104. Throughout 2012, AGU has performed nicely by returning 55.57 percent and outperforming most of its peers. Even though, the stock is trading around 52-week highs, analysts mean target price suggest at least 10 percent upside potential.

Compared to its peers' valuations, AGU's current price could offer a value opportunity. Agrium has a current P/E ratio of 10.13 and forward P/E of 10.41, which indicate a rather cheap stock. AGU is trading slightly less than book value and 2.25 times sales.

AGU's value opportunity is further enhanced by its price-to-free cash flow ratio of 11.97. In addition, the stock offers a dividend yield of 1 percent. Even though AGU's yield is less than that of most of its competitors, the company has increased its dividends by 90 percent within the last five years. Considering the low payout ratio of 7 percent, there is a lot of room for dividend growth.

Summary

Overall, Agrium is an intriguing investment. Agrium is the only publicly-traded company that operates across the whole agricultural value chain. This alone adds a comparative advantage to the company's operations. AGU is already more than 50 percent up this year. However, its valuation metrics and future growth prospects still stimulate investor interest.

The recent drought has negatively impacted corn inventories. Consequently, corn plantings are anticipated to rise to sky-high levels next year. Combined with U.S. farmers' increased income attributed to higher grain prices and insurance payments, Agrium expects sales to be robust.

Last but not least, the recent shale gas boom led to a historical drop in gas prices. As gas is a primary feedstock for nitrogen production, nitrogen fertilizers have benefited from this drop. More than half of Agrium's income derives from the nitrogen segment, which makes it a direct beneficiary of the current low price environment.

Source: This Fertilizer Stock Has Good Upside Potential