Agrium Inc.
/ (AGU-NYSE)We are upgrading our recommendation on Agrium to Neutral. Adjusted earnings for the third quarter beatthe Zacks Consensus Estimate while sales miss. Profit fell year over year on lower pricing and production outages. Gain in the core retail business was offset by declines inother areas. The pricing environment for phosphate is expected to remain soft through the balance of 2013. Moreover, demand for potash and phosphate is expected to be weak in India, a key market. Nevertheless, Agrium stands to benefit from overall strong fundamentals for the agriculture and crop input market. The company is expected to see strong demand for crop protection products in the fourth quarter. We are also encouraged by Agrium’scommitments to boost shareholder returns.
/ Equity Research / AGU | Page 1
Current Recommendation / NEUTRAL
Prior Recommendation / Underperform
Date of Last Change / 11/13/2013
Current Price (11/12/13) / $90.74
Target Price / $95.00
SUMMARY
/ Equity Research / AGU | Page 1SUMMARY DATA
52-Week High / $114.6352-Week Low / $81.65
One-Year Return (%) / -3.32
Beta / 1.48
Average Daily Volume (sh) / 1,078,921
Shares Outstanding (mil) / 147
Market Capitalization ($mil) / $13,339
Short Interest Ratio (days) / 1.41
Institutional Ownership (%) / 72
Insider Ownership (%) / N/A
Annual Cash Dividend / $3.00
Dividend Yield (%) / 3.31
5-Yr. Historical Growth Rates
Sales (%) / 15.7
Earnings Per Share (%) / 21.4
Dividend (%) / 104.4
P/E using TTM EPS / 10.3
P/E using 2013 Estimate / 11.6
P/E using 2014 Estimate / 11.2
Zacks Rank*: Short Term
1–3 months outlook / 3 - Hold
* Definition / Disclosure on last page
Risk Level * / Below Avg.,
Type of Stock / Large-Blend
Industry / Fertilizers
Zacks Industry Rank * / 245 out of 267
OVERVIEW
Agrium Inc., based in Alberta, Canada, is a major retailer of agricultural products and services in North and South America. Agrium is the third largest potash producer in North America. The company is also a leading global wholesale producer and marketer of all three major agricultural macronutrients − nitrogen, potash, and phosphate − besides being a premier supplier of micronutrients and specialty fertilizers in the U.S. and Canada. Agrium operates in three segments – Retail, Wholesale and Agrium Advanced Technologies.
The Retail segment offers Crop Nutrients, Crop Protection Products, Seed, Merchandise and Application & Other Services directly to farmers. Crop Nutrients include a complete range of products such as nitrogen, phosphate, potash, sulfur and micronutrients in either liquid or dry form. Crop Protection Products consist of herbicides, insecticides and fungicides. Seeds contain a complete range of crop seeds as well as liquid and dry fertilizers.
The Retail segment operates 444 farm centers and 49 distribution/warehouse facilities across 30 states in the U.S., Argentina and Chile. It has three business trademarks:
- Crop Production Services (CPS) serves the Corn Belt and Eastern agricultural regions of the U.S. growing key crops such as corn, soybeans, wheat and cotton.
- Western Farm Services (WFS) serves the Western U.S. including California, Arizona, Washington, Oregon and Idaho, growing crops including fruit, vegetables and wheat.
- Agroservicios Pampeanos S.A. (ASP) in South America – a wholly owned subsidiary – serves the wheat, soybeans and corn growing region of Argentina and the fruit growing region of Chile.
The Wholesale segment provides nitrogen; phosphate and potash based fertilizers and products purchased from domestic and international suppliers for resale in the U.S. and Canadian markets. About 85% of the Wholesale business is targeted at the agricultural market using crop nutrients to help enhance yields, while the remaining 15% is used for a broad range of industrial purposes, which include ammonia in dry and liquid form, urea and urea ammonium nitrate (UAN). Urea is the largest of Agrium’s Wholesale products. The company has 6 nitrogen facilities, 4 in Alberta and 1 each in Argentina and Texas; 1 potash mine at Vanscoy, Saskatchewan; and 2 phosphate products facilities in Conda, Idaho and Redwater, Alberta.
The Advanced Technologies segment(AAT) promotes cutting-edge environment-friendly, controlled-release fertilizer technologies. The segment produces micronutrients as well as specialty products for retail consumer, professional turf, horticultural and agricultural markets under brands such as Polyon, Duration and the environmentally smart nitrogen ESN, a polymer coated crop nutrient.
Other Business Unit is Agrium’s non-operating reporting line where the elimination of inter-segment transactions and corporate expenses are recorded. Inter-segment transactions are primarily related to sales of crop nutrients to Retail and AAT units from Wholesale unit.
Acquisitions
On December 3, 2010, Agrium acquired 100% of AWB, an agribusiness operating in Australia, for $1.2 billion in cash and $37 million of acquisition costs. On May 11, 2011, the company completed the sale of the majority of the Commodity Management businesses acquired from AWB, in accordance with an agreement dated December 15, 2010. Cash received from the sale was $694 million.
Agrium retained its Landmark retail operations, including over 200 company-owned retail locations and over 140 retail franchise and wholesale customer locations in Australia. The primary purpose of the acquisition was to expand the retail division and provide access to the growing Southeast Asia market. The acquired business is included in the Retail operating segment.
Agrium, in March 2012, entered into an agreement with Viterra Inc. to acquire the majority of its Agri-products business. The acquisition was completed in October 2013.Agrium acquiredmore than 200 retail stores across Canada and Australia. The acquisition of Viterra’s assets is an excellent fit to Agrium’s portfolio as it will be able to provide highly competitive products, services and technologies by combining its experience with Viterra's profound knowledge of western Canadian agriculture.
On August 2, 2012, Agrium and Glencore announced that CF Industries Holdings Inc. (CF), which owns a 66% interest in the Medicine Hat nitrogen facility, will buy Viterra's (now acquired by Glencore) 34% interest in the facility for C$915 million. CF Industries completed the acquisition during second-quarter 2013. Pursuant to the transaction closure, Agrium received $932 million which is subject to adjustment according to its agreement with Glencore.
REASONS TO BUY
Agrium’s crop protection markets remain competitive, but margins have stabilized recently. Demand for crop protection products in North America has been strong due to attractive grower economics and improving crop conditions in several areas of North America. Agrium expects strong corn and cotton seed sales based on a favorable outlook for prices and seeded area.Global demand for potash remainshealthy with shipments are expected to grow roughly 6%-10% in 2013.
Agrium follows a focused strategy to grow along the value chain through a combination of acquisitions and organic development. The company, in May 2011, acquired Cerealtoscana S.p.A. (“CT”) and its subsidiary Agroport for $27 million plus working capital. Agrium, in December 2011, approved a one million ton brownfield potash capacity expansion at its Vanscoy potash facility in Saskatchewan, Canada. The expansion is expected to increase annual production capacity by approximately 50%, bringing the total annual nameplate capacity to three million tons. The completion of construction has been projected by the second half of 2014.
In the Wholesale business, Agrium expects India to be a significant growth driver as there has been a strong demand for urea in India due to heavy rains. Chinaand Brazilalso accounts for a large part of this demand. The company also expects that nitrogen producers in North America should benefit from relatively lower natural gas prices, in part, driven by shale gas production. Moreover, demand for seeds is expected to be boosted by increased corn acreage in the U.S.
Agrium is committed to deliver value-added growth while maintaining shareholders value.The company recently hiked in its quarterly dividend by 50% to $0.75 per share from the prior payout of $0.50. On annualized basis, this represents a payout of $3.00 per share, an increase by $1.00 per share.The dividend increase is part of Agrium's annual strategic review process and a step toward acknowledging the company’s strength in its long-term agriculture fundamentals and the benefits of its integrated model.The dividend hike testifies Agrium's ability to generate significant cash flow from its business and also proclaims the strength that it holds across the crop-input value chain.Agrium also continues share repurchases. The company aims to return 25% to 35% of its free cash flow to shareholders.
Agrium is poised to benefit from increasing crop prices and overall strong fundamentals for the agriculture and crop input market.High crop prices (especially for corn) and tight inventories resulting from the drought are expected to create significant demand for its crop nutrients. The U.S. drought, high crop pricing and better genetic offerings are expected to boost demand for seeds. Outlook for crop protection products is favorable for the final quarter of 2013 and next spring driven by greater use of fungicides and extendeduse of residual herbicides as glyphosate-resistant in wheat.
REASONS TO SELL
Potash demand is expected to remain weak in India. Changes in pricing and subsidy policies by the Indian government are expected to continue to affect demand in the country. Moreover, global phosphate market is expected to remain weak in the near term, partly due to lower demand from India(a major phosphate import market) given government policy changes. Phosphate import is expected to decline in India in 2013 and potentially next year due to the change in subsidy and currency devaluation. Weak phosphate pricing also remains a concern. Moreover, nitrogen prices will be under pressure given the uncertainty surrounding anticipated Chinese export supplies.
Agrium and other fertilizers and agricultural chemicals makers face significant challenges following the recent exit of world's largest potash maker Uralkali Group from one of the biggest potash cartels – the Belarus Potash Company (BPC). Uralkali’s Board decided to end export sales through BPC and direct all potash export through its Switzerland-based trade arm Uralkali Trading. BPC is one of the two largest cartels (along with North America’s Canpotex) that influence potash pricing by controlling the production and supply. Uralkali’s game-changing move has triggered industry-wide fear of a price war which may push potash prices down and put pressure on fertilizer makers. The dissolution has created an uncertain environment which is likely to sustain into 2014.
The global macroeconomic situation presents some risks that have the potential to impact agricultural markets. Significant uncertainty surrounds the outcome of sovereign debt problems in Europe and the record high U.S. government debt levels.
Agrium is subject to risks arising from legal disputes. At present, the company is facing a number of litigation claims, and may be subject to further disputes and lawsuits. Any material or costly dispute or litigation could adversely impact Agrium and its consolidated financial position as well as results of operations.
Agrium is susceptible to natural gas price volatility. Natural gas is the key raw material used to make nitrogen and represents the largest purchased raw material in the company’s Wholesale segment. Higher natural gas prices may impact nitrogen margins in the segment.
RECENT NEWS
Agrium Beats on Earnings, Profit Skids– November5, 2013
Agrium’s profit for third-quarter 2013 dropped 41% year over year to $76 million or $0.52 per share from $129 million or $0.80 per share a year ago.
The results were affected by lower sales prices for urea, phosphate and potash and production outages across Agrium’s Redwater and Carseland nitrogen facilities. Moreover, uncertain fertilizer market conditions coupled with late growing season in North America that caused growers to delay crop nutrient purchases also contributed to the lower results.
Excluding one-time items other than stock-based payments, earnings of $0.61 per share beat the Zacks Consensus Estimate of $0.59. Adjusted earnings exclude write-down on Agrium’s Hanfeng Evergreen Inc. investment and loss on hedge positions.
Agrium logged revenues $2,869 million in the reported quarter, a roughly 1% year over year rise. Gain in the core retail franchise was offset by declines across wholesale and advanced technologies businesses. Sales missed the Zacks Consensus Estimate of $2,944 million.
Segment Highlights
Revenues from the Retail segment rose 15% year over year to $2.1 billion in the reported quarter due to a more regular seasonal crop input demand and higher sales from acquired retail businesses. Gross profit rose 17% year over year to $511 million on higher crop protection sales volume. The company witnessed higher sales from crop nutrient (up 3%), crop protection (up 26%) and seed (up 23%) in the quarter.
The Wholesale segment's sales dropped 24% to $752 million, hurt by lower realized sales prices for urea, potash and phosphate and outages at the company’s nitrogen facilities. Gross profit tumbled 59% year over year to $490 million due to lower pricing and decline in urea and phosphate sales volume as a result of plant outages.
Nitrogen and phosphate sales volume fell 22% and 26%, respectively, in the quarter. Domestic and international potash sales volumes surged 55% and 95%, respectively.
Revenues from the Advanced Technologies segment fell 14% to $108 million due to a decline in Environmentally Smart Nitrogen (ESN) volumes and lower pricing resulting from a weak urea market. Gross profit fell 57% year over year to $12 million.
Financial Position
Agrium exited the quarter with cash and cash equivalent of $255 million, down roughly 86% year over year. Long-term debt increased 92% year over year to $3 billion.
Outlook
Moving ahead, lost production due to nitrogen plant outages is expected to impact sales volumes in the fourth quarter and reduce earnings for the quarter by $0.20 per share. Agrium expects earnings (excluding items) for the fourth quarter in the band of $0.80 to $1.25 per share.
Agrium sees strong demand for crop protection products in the fourth quarter on higher use of alternative active ingredients to glyphosate to counter increased weed resistance as well as increased use of fungicides.
Global potash market fundamentals are expected to remain challenging in the fourth quarter as a result of higher inventories and expected decline in Brazilian potash imports. Outlook for domestic potash demand is favorable for the quarter.
The potash market was hit by lower pricing and cautious buyer behavior in the third quarter due to the exit of Uralkali Group from BPC and delay in Chinese supply deals.
On the phosphate front, global market conditions are expected to remain challenging in the fourth quarter partly due to the uncertain demand environment in India (a major phosphate import market). Phosphate import in India is expected to be hindered by delayed government subsidy payments and currency devaluation. Weak phosphate pricing also remains a concern.
Agrium Q2 Earnings and Revs Beat– August 7, 2013
Agrium's second-quarter 2013 earnings (excluding one-time items other than stock-based compensation expenses) of $5.09 per share beat the Zacks Consensus Estimate of $4.95. After including one-time items, the company reported earnings of $5.02 per share compared with $5.44 in the year-ago quarter. Profit fell 13.1% year over year to $747 million as cold weather in North America caused farmers to make fewer applications in the quarter.
Revenues increased roughly 3.6% year over year to $7,016 million in the reported quarter and exceeded the Zacks Consensus Estimate of $7,000 million. Increased Retail and Advanced Technologies sales led to the higher revenues in the quarter.
Segment Highlights
Revenues from the Retail segment rose 7% year over year to $5.6 billion in the reported quarter due to a more regular seasonal crop input demand for the first half of 2013 in North America and the a very early planting season in 2012. Gross profit remained flat at $1.1 billion and earnings before interest, taxes, depreciation and amortization (EBITDA) was $619 million, up 2.3% year over year.
The Wholesale segment's sales fell 9% to $1.5 billion. The segment’s EBITDA of $517 million represented a decline of $160 million from the year-ago quarter. Results of the segment were affected by lower realized sales prices for urea, potash and phosphate as a result of global market pressures accompanied by an unplanned outage at the company’s Redwater nitrogen facility.
Revenues from the Advanced Technologies segment rose 16% to $207 million and EBITDA from the division shot up 20% year over year to $24 million due to strong ESN volumes as a result of gains in market acceptance in North America for the product and higher production at its New Madrid facility.
Financial Position
Agrium’s cash and cash equivalents were $494 million as of Jun 30, 2013, compared with $1,946 million as of Jun 30, 2012. Cash provided by operating activities was $298 million as of Jun 30, 2013, compared with $1,120 million as of Jun 30, 2012.
Outlook
Looking ahead, Agrium expects strong demand for crop inputs in the second half of 2013 as farmers seek to increase crop yields. The optimism is also based on strong nutrient removal in 2013 and the affordability of crop nutrients.
VALUATION
Currently, Agrium shares are trading at 11.6x our 2013 EPS estimate of $7.79. The company’s trailing 12-month earnings multiple is 10.3x, compared with the 12.4x average for the peer group and 18x for the S&P 500. Over the last five years, the company’s shares have traded in the range of 3.6x to 21.9x trailing 12-month earnings. Our long-term Neutral recommendation on the stock indicates that it should perform in line with the broader market.Our price target of $95 is based on 12.2x our 2013earnings estimate.