Agrium Inc. $26 – Toronto symbol AGU

AGRIUM INC. $26 (Toronto symbol AGU; Aggressive Growth Portfolio, Resources sector; SI Rating: Average) is a leading supplier of fertilizers and agricultural chemicals.

The company uses natural gas to make its nitrogen-based fertilizers, which account for roughly 40% of its revenue and profits. Agrium also makes fertilizers from potash and phosphate, which come primarily from mines it operates in Western Canada.

The ongoing resources boom should eventually spread to the agriculture industry, and spur fertilizer demand and Agrium’s profits.

Agrium recently paid $474 million for Royster-Clark Ltd., which operates 250 retail outlets in the United States (all amounts except share price in U.S. dollars).

The purchase doubled the company’s retail operations, which cuts its reliance on the volatile bulk fertilizer business.

Agrium subsequently sold one of Royster-Clark’s facilities for $50 million. It also feels that merging certain operations with Royster-Clark will help it save $30 million a year.

To put these amounts in perspective, Agrium lost $0.37 a share (total $48 million) in the first quarter of 2006. The company uses hedging contracts to lock in natural gas prices, but lower market prices led to a $43 million pre-tax hedging loss in the most recent quarter. It earned $0.18 a share ($24 million) in the year-earlier quarter.

The acquisition of Royster-Clark helped increase revenue in the quarter by 22.3%, to $657 million from $537 million. Agrium’s business is seasonal, and sales are typically strongest during the second and third quarters.

The stock rose from $22 before the Royster-Clark purchase to $31 in May 2006. It now trades at 10.6 times the $2.20 U.S. a share it should earn in 2006, and at 6.7 times its forecasted cash flow per share of $3.50 U.S. The $0.11 U.S. dividend yields 0.5%.

Agrium is a buy.

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