What Makes this Stock a Definite Grab on Any Dip
Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Even before Agrium’s (NYSE: AGU) second-quarter results were out, the market knew what was coming. After all, the fertilizer giant had upgraded its earnings guidance some days back.
What followed was music to investors’ ears. It was Agrium’s strongest second quarter in history. Being a nitrogen player definitely helps, but there are other advantages too, which I feel will take the company far.
The king of nutrients
Nitrogen has historically proved to be more profitable than other nutrients, namely potash and phosphate. Demand for nitrogen has risen at a much faster pace than the other two in the past two decades. Understandably so when a top produced-and-consumed crop like corn requires more of nitrogen than any other nutrient.
Recent numbers from fertilizer players have only supported the argument in favor of nitrogen players. CF Industries (NYSE: CF), the largest North American producer of nitrogen, is probably the best example here. It earned record net profits in its second quarter despite a 22% dip in its phosphates division sales, thanks to higher demand and prices for nitrogen products. The scenario was pretty similar at PotashCorp (NYSE: POT). Though demand and price for potash were slightly better than last year, that of phosphates fell during its second quarter. But it was the nitrogen division that recorded the highest price and gross margin jumps.
Now consider the contrasting case of no-nitrogen company Mosaic (NYSE: MOS). Its last-quarter sales were flat while net profits slumped 22% on lower sales in both potash and phosphates divisions. Agrium’s record earnings in its second quarter thus proves how the company is at an advantage because nitrogen accounts for a major chunk of its revenue.
It’s raining gains
Nitrogen is the top revenue contributor in Agrium’s largest division, retail. Even through its wholesale division, the company sells more nitrogen than both potash and phosphate taken together. Retail sales hit a record high of $5.2 billion during the second quarter, up 12% from the year-ago period as demand for all products grew.
But for a nitrogen player, gains aren’t restricted to demand or prices alone. With key input natural gas prices languishing at the bottom of the barrel now, low costs double up as an added advantage. Agrium’s nitrogen gross margin in the last quarter shot up by 50% from last year. Likewise, CF’s nitrogen division gross margins came in at an impressive 66% in its second quarter. As long as gas remains cheap, Agrium’s margins should only head north.
Now that the strong spring planting season is over, what’s in store for Agrium? Many are getting a little apprehensive about the impact of the drought on farm receipts, and thus on demand for nutrients for the rest of the year. According to the latest update from the U.S. Department of Agriculture, nearly 50% of the total corn crop in the U.S. is in poor to very poor condition – a level dangerously close to 53% last seen in drought year 1988.
Yet, a few things suggest that it might not be a hard landing for Agrium:
- Corn prices are at all-time highs right now, which could offset low yields to result in decent farm cash receipts. High crop prices are a great incentive for farmers to grow more in the next season, especially if yields aren’t as expected this time around. And going back to the two drought years in the '80s, both 1983 and 1988 were followed by periods of higher farm spending on fertilizers and crop protection products.
- With the drought hitting pretty late in the crop growing cycle, most nutrients, particularly nitrogen, would have already been absorbed. Which means nitrogen will have to be reapplied this fall to make the soil fit for the next round of spring plantations, thereby keeping demand firm. This could be one reason why PotashCorp is expecting "significant fall fertilizer applications" for nitrogen. CVR Partners (NYSE: UAN), which is a pure-nitrogen player, has received heavy pre-fall orders, and already booked orders for almost all the ammonia it will produce in the next two quarters.
- Both Agrium and PotashCorp have highlighted the depleting levels of potash and phosphate in soils across major crop-growing regions, suggesting how these nutrients could see higher demand in the future. Phosphate volumes as well as prices are anyway firming, as evident in Mosaic’s last quarter.
- Brazil is gearing up for its spring, and farmers are targeting record plantations over the next two months. Most companies, including Agrium, are likely to see robust demand for inputs from this region.
Agrium could be a bigger beneficiary of all this as its portfolio encompasses not just the top three nutrients but also seeds and crop protection products, providing it with more revenue streams to bank on than most peers. The company is also increasing both potash and nitrogen capacities, and even looking at a greenfield project. Being a part of Canpotex -- the three-member legal cartel that controls all potash exports out of Saskatchewan -- is another solid advantage. And Agrium is all set to grow bigger in Canada once it takes over Viterra's agri business later this year.
For those who believe in the buy-and-hold strategy like I do, Agrium looks like a solid bet. The recent run-up in the stock prices of this largest direct-to-grower retailer in the Americas proves its return-yielding powers. Click here to keep a tab on Agrium, for any dip could mean an opportunity.
Neha Chamaria has no positions in the stocks mentioned above. The Motley Fool owns shares of CF Industries Holdings. Motley Fool newsletter services recommend PotashCorp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.