AGRIUM INC. $87 (Toronto symbol AGU; Aggressive Growth Portfolio, Resources sector; Shares outstanding: 147.0 million; Market cap: $12.8 billion; Price-to-sales ratio: 0.8; Dividend yield: 3.6%; TSINetwork Rating: Average; www.agrium.com) has expanded its retail operations in the past few years.
This business is now the world’s largest seller of seeds, fertilizers and other products to farmers, with over 1,200 stores in North America, Australia, Argentina, Chile, Uruguay and Brazil. In 2012, the retail division accounted for 65% of Agrium’s revenue and 32% of its earnings.
In addition, Agrium makes nitrogen-based fertilizer at four wholly owned plants in Canada and one in the U.S. It also owns 50% of a nitrogen facility in Argentina and 26% of one in Egypt. Operating in these countries adds risk, but these plants only account for a small part of Agrium’s revenue. In addition, this division makes potash and phosphate fertilizers.
The fertilizer division supplied 31% of Agrium’s 2012 revenue but a high 66% of its earnings. That’s largely because the company needs natural gas to make these products, and low gas prices have increased its profit margins.
The remaining 4% of Agrium’s revenue and 2% of its earnings come from its Advanced Technologies business, which makes specialized fertilizers for golf courses and lawn-care companies.
Fertilizer demand depends on several factors, such as crop prices and weather conditions. Agrium’s revenue fell 9.0%, from $10.0 billion in 2008 to $9.1 billion in 2009 (all amounts except share price and market cap in U.S. dollars).
In 2010, Agrium paid $1.2 billion for 400 farm-supply stores in Australia and New Zealand. Thanks to this purchase, as well as rising fertilizer prices, revenue jumped to $16.7 billion in 2012.
Earnings fell 72.1% from $8.34 a share (or a total of $1.3 billion) in 2008 to $2.33 a share (or $366.0 million) in 2009. Profits turned around in 2010 and shot up to $9.52 a share (or $1.50 billion) in 2011. In 2012, overall earnings slipped to $1.49 billion, but per-share earnings improved to $9.55 on fewer shares outstanding.
Cash flow per share dropped 60.6%, from $9.81 in 2008 to $3.87 in 2009. However, it improved to $6.74 in 2010 and rose to $13.01 in 2012.
Hanging on to retail business
Earlier this year, Agrium fended off demands from activist investment firm Jana Partners to sell or spin off its retail outlets; Jana is Agrium’s largest shareholder, with a 7.5% stake. Agrium believes the stores’ steady revenue streams help offset the cyclical nature of its fertilizer business.
Partly in response to Jana’s pressure, Agrium has expanded its share buyback program. It now aims to repurchase 5% of its stock over the next year. In addition, the company raised its dividend by 50.0%, to $3.00 U.S. a share from $2.00 U.S. The new rate yields 3.3%.
Agrium continues to add to its retail business. In October 2013, it completed its purchase of 210 stores in Western Canada from grain-handling firm Viterra. The deal also included Viterra’s 13 Australian outlets.
In all, Agrium paid $300 million for these stores, and they should add $75 million to $90 million to its annual gross profits. As well, the company feels it can save $15 million to $20 million by the end of 2015 by eliminating functions that overlap with its current retail operations.
The company can easily afford this purchase. As of June 30, 2013, its long-term debt was $3.1 billion, or a moderate 25% of its market cap. It also held cash of $494 million, or $3.34 a share.
Project delays make sense
Agrium continues to conserve cash. Recently, it suspended work on two major nitrogen fertilizer projects because its competitors have similar developments that will boost supply and may hurt prices. However, Agrium is still considering an expansion at its nitrogen plant in Borger, Texas, that would cost up to $600 million. The company will make a final decision later this year.
Agrium’s shares rose as high as $116 in January 2013, mainly due to the pressure from Jana, but they fell after Jana failed to unseat Agrium’s directors at the annual meeting in April. Even so, the stock is up 262.5% since we named it our Stock of the Year in 2005 at $24.
The company expects to sell 20% less nitrogen fertilizer in the third quarter of 2013 than it did a year earlier. That’s partly because of an unplanned outage at its plant in Redwater, Alberta.
Agrium also expects that sales volumes of phosphate and potash will likely each fall 30% in the quarter. Part of the lower demand is related to the drop in the value of the Indian rupee, which raises the cost of imported fertilizer in that country.
Bargain multiples add appeal
The lower fertilizer volumes will likely cut Agrium’s per share earnings by 10.3% in 2013, to $8.51. The stock trades at just 9.8 times that forecast. It is also attractive at 7.4 times Agrium’s likely cash flow of $11.30 a share.
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