Status Quo At Agrium A Concern

| About: Nutrien Ltd. (NTR)
This article is now exclusive for PRO subscribers.

I recommend taking profits in Agrium (AGU) today. We made a little money but the clouds are getting more grayish over Europe.

Yes the stock may go higher if Agrium and its chosen advisor Morgan Stanley come out with a plan to enhance shareholder value and appease a disgruntled hedge fund named Jana Partners LLC.

Morgan Stanley came on board in June, so it is likely they have a "Plan B" if stonewalling this pesky $3 billion hedge fund that is bothering their client doesn't work.

The stock is currently (3:45pm) trading at $100.97 US and $100.14 CAD on higher than normal 2.2 million combined shares.

But in my view, the stock could drop 10% if most likely Europe goes south again, and before the "Dutch Auction" to buy back $900 million in shares is consummated in October.

We might buy back the shares at that point - i.e. on weakness.

Reason for our sale of Agrium? I think potash mine capacity expansions by Agrium and PotashCorp (POT) have been ill-advised and I have said and written as much.

My most recent concerns are the most recent announcements of potash mine development delays by Vale (NYSE:VALE) and potentially by BHP Billiton (NYSE:BHP) and a curtailment by PotashCorp at Lanigan, their biggest potash mine (here).

So why has Agrium sunk a ton of money into a potash expansion at Vanscoy? Over $1.5 billion for just 1 million tons of annual capacity - coming on-line just when other big mine expansions are scheduled?

Another risk to the potash business is medium term, but ominous.

Agrium, PotashCorp and The Mosaic Company (NYSE:MOS) face a serious challenge to the legitimacy of Canpotex, the potash international marketing company, here, in the form of the anti-trust suit against seven potash producers that was allowed to proceed recently in a U.S appeals court.

If the fertilizer dealers that launched the lawsuit are successful in their claim that Canpotex and other producers maintain artificially high U.S. potash prices, that would be a nail in the coffin of the big gross margins the potash producers enjoy.

Agrium has severely underperformed the top three companies in the list of Morgan Stanley generated "comparables."

The prospective P/Es of Tractor Supply (NASDAQ:TSCO), Watsco (NYSE:WSO) and Grainger (NYSE:GWW) are double digit versus Agrium's nine handle.

Unfortunately, certain Canadian shareholders and the press have supported the view the status quo at Agrium is fine.

Agrium has "superb management" - as on shareholder claims here- maybe so.

But I might take issue with a claim that management's desire to maximize shareholder value exceeds their motivation to build a bigger company.

Agrium didn't raise the dividend (5.5 cents semi-annual) for a whole decade until December 2011. That in itself is rather astonishing.

I appeared on BNN TV on August 18 and September 16, 2011 to complain about the paltry dividend as well as the lack of a share buyback. Agrium will argue they had to finance their growth strategy, but you have to have a balance between long-term growth and rewarding the people that actually own the company.

Just ask the people at Viterra what they think about the benefits of not raising the dividend for several years - taken over by Glencore International. If Agrium executives wanted to really avoid a takeover, they might pay more attention to independent analysts, and less time with the investment bankers they coddle and large shareholders they smooth sell. P.S. This is no criticism of VP IR Richard Downey and the rest of the investor relations team, which do a bang up and largely thankless job, in my opinion.

Ironically, I think Jana Partners, which has latched on to Agrium like a terrier with a bone, is barking up the wrong tree regarding its criticism of the latter's retail division using too much working capital.

High working capital balances at the beginning of the planting season is a necessary evil in agriculture as Richard Gearheard, Agrium's head of retail, said on the recent Q2 earnings call, they have to buy inventory to have something to sell!) and there is little indication that can be pared down.

I think P/CF and EV/EBITDA multiples on agriculture names are inherently modest due to the seasonality in agriculture product demand. And as any farmer will tell you, weather is new every year, and you're always going to get some.

Agrium has successfully smoothed out some of the seasonality in its core U.S. and Canadian domestic operations by adding Southern Hemisphere retail chains in Australia and Argenina.

This smoothing of cash flow volatility, working capital needs, and weather risk, mean the multiple on Agrium's retail operations should go up, not down, from historical levels.

Arguably, it is time to also consolidate the Company's most recent acquisition of Viterra's Western Canadian retail stores, and reward shareholders. The stock has underperformed arguably the best agriculture sales market in history.

It's disingenuous for Agrium to argue in a recent slide presentation to say UAP Holdings, a U.S. farm retail operation Agrium bought in late 2007 and therefore a close comparable, would have a lower multiple today than when it was a stand-alone company. And instead to offer comparables in industries that have little of the great opportunity that agriculture sales have.

In 2007, no one dreamed you could get $8 corn and $17 soybeans. We owned UAP in 2007 but missed the takeover and know the multiple on a potential takeover candidate is usually higher than normal. If Agrium were to spin off all or part of its wholesale division, it would garner a higher multiple than associated with the combined company.

In any event, UAP Holdings was domestic only, and did not have the global reach that Agrium is developing.

There is no true comparable for Agrium. It is a unique company and I'd be sad if it fell into foreign hands.

But I think the Board and senior management have to be held more closely accountable for their prior and future actions. (see here)

I really think that Agrium's Board and senior management are worried (or should be worried if they aren't) that if they were to split the company into two publicly traded divisions or otherwise reorganized, you could see the downfall of Canpotex, something that partners PotashCorp and The Mosaic Company might take pause to reflect on.

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.