5 Reasons This Sock Will Continue to Rally

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Top numbers, improved outlook – Deere has parceled the perfect gift to its shareholders on Valentine’s Day. And that should make someone else skip a heartbeat too.

Deere’s optimism is a good luck spell for agriculture players set to suit up with numbers over the next few days. Agrium’s (NYSE: AGU) one of them, and my advice is: don’t let the stock out of your sight next week.

What analysts say, what you should hear

Even before Agrium officially releases fourth-quarter numbers, most in the market must already have their calculations ready. No, it’s not about what they expect; it’s about what the company wants them to.

Over the past 30 days, analysts’ EPS estimate for Agrium has improved 26 cents, boiling down to $1.95. I’m not ruling out a higher number for two reasons: One, Agrium hopes to earn anything above $2 per share; two, and more important, it bumped up its outlook well after its fourth quarter was actually over. So logically, Agrium must know exactly how it fared during the quarter, which means there’s no real reason to expect something less.

For the full year, however, contrary to what analysts expect, Agrium might not be able to cap off another record year. Its numbers say so. For the nine months ended Sept. 30, 2012, the company earned $7.21 per share, lower than $7.48 earned in the same period 2011. For the fourth quarter, it expects to report EPS "slightly above $2." That might just fall short of the $9.52 per share it earned for 2011. Whatever be the numbers, Agrium’s outlook should make up for any disappointments.

Of spring and hope

Prices of essential crops like corn might have softened a bit in recent weeks, but they continue to remain firm enough to encourage farmers to plant more this year. Crop insurance claims are at an all-time high, leaving the ghosts of the drought well behind. CF Industries (NYSE: CF) anticipates U.S. farmers to plant 97 million acres of corn this spring, and is reportedly already booking big orders for nitrogen nutrient (catch CF’s earnings preview here).

Monsanto (NYSE: MON) gave out similar vibes in its last earnings call when it mentioned how its pre-spring U.S. order book as of Dec. 31 was already running ahead of that in 2011. "Strong" and "attractive" were how these companies described their current order books.

Agrium can’t be behind because it deals in both fertilizers (like CF) and seeds (like Monsanto). And among fertilizers, Agrium is 80% into nitrogen, the most widely applied and sought-after nutrient. Like CF, Agrium also enjoys the gas advantage. So it’s but natural to expect an upbeat guidance from Agrium for 2013.

Off to a good start

For the remaining 11% that makes up potash and phosphates business, 2013 is already turning out to a dream year, at least vis-à-vis 2012. Markets that were quiet for months, China and India, placed big orders with Canpotex – the three-member legal cartel that controls potash exports out of Saskatchewan, and of which Agrium is a member. All three – PotashCorp (NYSE: POT), Mosaic (NYSE: MOS), and Agrium – put plants to rest during the latter half of the year as demand weakened. Agrium’s potash facility is likely to have operated 10% lower during the fourth quarter compared to same period 2011, but things look set to improve.

Though Mosaic’s next-quarter outlook leaves much to be desired, the contract from India hadn’t made its way until then. The contract from China should keep Canpotex busy until June, but PotashCorp expects demand from the market to continue beyond that. It sees global demand for potash to be anything between 55 million to 57 million tonnes, way above last year’s 51 MT. As the biggest cartel member with more than 50% stake, PotashCorp’s words and views hold water.

On larger grounds

As Agrium’s order books fill up over the next few months, it will also likely wrap up the take-over of Viterra’s agri-business from Glencore. That will give Agrium a huge fillip in the Canadian and Australian markets, and mark a major milestone for 2013. As the year unfolds, and if Mother Nature decides to be benevolent this year, record U.S. plantations would mean a solid first half for Agrium. The latter would be fed by Latin America, which has emerged as a critical market for farming companies. Mosaic projects Brazil to apply a "record 31 million tonnes of plant nutrients this year," a sentiment echoed by PotashCorp. Monsanto has already tagged Latin America as its "first and biggest business driver" for the year and beyond. Analysts will look forward to Agrium’s projections and plans for the market.

Worth the wait

As the largest direct-to-grower retailer in the Americas with a portfolio (of nutrients, seeds, and crop protection products) that’s more widespread than most peers, Agrium stands to be one of the biggest beneficiaries of an agriculture boom. It was the top industry performer last year returning a staggering 45% to shareholders. Expecting a re-run might sound outlandish, but I almost certainly feel its stock will outperform the market again in 2013.

The rift between the company and activist hedge fund JANA Partners is getting intense, and chances of Agrium going all out to boost performance and returns to prove JANA wrong are high. For investors, that would act as cherry on the cake for a stock that’s already an out-performer.

Agrium’s projections for 2013, growth plans, hit at JANA, cash flows, and how it plans to reward shareholders – analysts would want a lot out of the company’s forthcoming earnings call. If you are keen as well, stay tuned as I dissect Agrium’s earnings release and future, just for you. Click here to add Agrium to your stock watchlist. 


Neha Chamaria has no position in any stocks mentioned. The Motley Fool owns shares of CF Industries Holdings. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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