AGRIUM INC. $126 - Toronto symbol AGU

AGRIUM INC. $126 (Toronto symbol AGU; Aggressive Growth Portfolio, Resources sector; Shares outstanding: 142.8 million; Market cap: $18.0 billion; Price-to-sales ratio: 1.1; Dividend yield: 3.6%; TSINetwork Rating: Average; www.agrium.com) has shifted its focus in the past few years from making fertilizers to selling them, along with seeds and other products, to farmers. That has cut its exposure to volatile bulk-fertilizer prices.

Agrium now gets 75% of its sales and 60% of its earnings from its retail stores, which consist of 1,500 locations in North America, South America and Australia. The remaining 25% of sales and 40% of earnings comes from making nitrogen-based fertilizers from natural gas. Agrium also operates potash and phosphate fertilizer mines. Crop prices, weather sway results Agrium’s sales and earnings vary with global crop prices and weather patterns. Higher fertilizer prices and acquisitions increased its sales by 49.2%, from $10.7 billion in 2010 to $16.0 billion in 2012 (all amounts except share price and market cap in U.S. dollars). Sales then slipped to $15.7 billion in 2013 before recovering to $16.0 billion in 2014. Earnings more than doubled, from $4.62 a share (or a total of $730.0 million) in 2010 to $9.67 (or $1.5 billion) in 2012. However, lower fertilizer prices cut its 2013 earnings to $7.31 a share (or $1.1 billion) and to $5.51 a share (or $798.0 million) in 2014. Without unusual items, earnings fell 20.2%, from $7.28 in 2013 to to $5.81 in 2014. Agrium’s earnings should rebound over the next few years, as it recently finished a major expansion of its Vanscoy potash mine in Saskatchewan. It’s also upgrading its plant in Borger, Texas, which will let it make both dry and liquid fertilizers. As these projects wind down, Agrium’s capital spending will likely fall to $750 million in 2016 from around $1.3 billion in 2015. Better efficiency will free up cash At the same time, the company is making its other facilities more efficient, which should save it a total of $350 million by 2017. These savings, along with the additional cash flow from the new operations, should will give Agrium lots of room for more share buybacks and dividends. In the first half of 2015, the company repurchased $100 million worth of its shares. It also recently increased its quarterly dividend by 12.2%, to $0.875 from $0.78. The new annual rate of $3.50 yields 3.6%. Low p/e discounts strong potential Lower crop prices and bad weather in North America will probably cut the company’s 2015 earnings to $7.19 a share. However, the startup of the Vanscoy and Borger projects could lift Agrium’s 2016 earnings to $8.22 a share, and the stock trades at just 11.8 times that forecast. That’s a low multiple, particularly in light of the long-term need for more and better food. Agrium is a buy.

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