Topic: Energy Stocks

Best Canadian Stocks: Agrium has an answer to low potash prices

Commodity Investments

Every Tuesday we bring you “Best Canadian Stocks.” You get our specific recommendations on the stocks we profile, with a full explanation of how we arrived at our opinion. You’ll read about stocks making moves you should know about, from coverage  in one of our three newsletters featuring Canadian stocks—The Successful Investor, Stock Pickers Digest and Canadian Wealth Advisor.

A sinkhole recently forced Russia’s Uralkali to close its Solikamsk-2 mine, which accounts for 20% of Uralkali’s potash production and 3.5% of global capacity.

Uralkali didn’t say how long it would take to reopen the mine, but it could close it permanently.

Regardless of the length of the shutdown, high potash inventories will continue to weigh on prices. Moreover, this year’s record U.S. harvest has hurt corn, soybean and wheat prices, prompting farmers to store excess crops while they wait for a rebound.

However, we feel that steady sales from Agrium’s retail stores give it an advantage over bulk fertilizer producers like Potash Corp.

AGRIUM INC. (Toronto symbol AGU; gets just 3% of its revenue from potash, so the Russian mine shutdown will have little impact on its short-term earnings.

Agrium’s 1,400 retail stores supply 78% of its revenue. Nitrogen fertilizers it manufactures from natural gas provide the remaining 19%.

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Commodity stocks: Retail sales help push up revenues for Agrium

Equipment failures forced the company to shut down its Vanscoy potash mine in Saskatchewan. Agrium is taking advantage of this outage to increase this project’s capacity by 40%.

This expansion will cost $2 billion (all amounts except share price and market cap in U.S. dollars). Vanscoy should resume operating shortly, and reach full capacity by 2018.

Meanwhile, the company’s earnings rose 8.8% in the three months ended September 30, 2014, to $87 million from $80 million a year earlier. Earnings per share rose 11.1%, to $0.60 from $0.54, on fewer shares outstanding. Revenue gained 4.4%, to $2.9 billion from $2.8 billion.

These increases are partly due to the Western Canadian retail stores Agrium bought from Viterra in October 2013. Higher earnings from its nitrogen and phosphate fertilizer operations, as well as a lower income tax rate, also contributed.

The company now plans to sell some of its less-important businesses and cut 3% of its workforce. These moves should save it a total of $475 million by 2017.

The stock trades at 15.6 times the $6.07 a share that Agrium will probably earn this year. However, its earnings could rise to $8.42 a share in 2015, and the stock trades at just 11.3 times that estimate. The $3.12 dividend yields 3.3%.

Agrium is a buy recommendation of The Successful Investor.


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