Why You Can't Miss Agrium Inc.
Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Agrium (NYSE: AGU) is one of the largest agricultural product retailers in both North and South America. The company produces the major three fertilizers the industry requires; nitrogen, phosphate, and potash. The company with a market cap in excess of $15 billion is located in Canada and provides crop nutrients, seeds, and seed protection nutrients directly to farmers. The company invested more than $5 billion since 2005, for acquisitions of more than 15 major companies and other expansion plans.
The company is making news these days for a number of reasons, some of which tell us to buy the stock. Here are a few compelling reasons as to why one should own Agrium shares.
Spinning off the business
The stock recently made a lot of headlines when the hedge fund, Jana Partners, announced that it had acquired 5% stake in the company, and will be contesting managerial decisions. The hedge fund demands that the retail and wholesale division of the companies should become two separate entities and should function separately. Since management chose to refuse what its 5% shareholder is demanding, Agrium could now pick up more shares from the market, and that could mean an upside for the stock. Also Agrium has hired Morgan Stanley, which is the leading agricultural advisor these days, to deal with the matter effectively. Not long ago, Morgan Stanley advised CF Industries (NYSE: CF) to buy out Terra Industries.
CF Industries is one of the leading competitors of Agrium Inc. with a market cap of around $13 billion. In 2009, Agrium had proposed to buy out CF industries for $3.6 billion. To facilitate the acquisition, Agrium Inc had entered an agreement with Terra Industries to sell a portion of its stake in its Carseland nitrogen facility. A chain was formed when CF Industries bid for Terra Industries, and at the end of the saga, Agrium had to abandon its bid for CF Industries.
Profiting from the corn shortage
The US agriculture secretary recently stated that the drought faced by the US is one of the worst in the last few decades. Crop prices have gone up significantly due to the shortage in agricultural production. One of the crops to get affected by the heat wave is corn. The price of corn has shot up significantly, and the US Department of Agriculture (USDA) is expecting a steep fall in corn production this year. A Citigroup investment research report claims that fertilizer companies are likely to benefit from the shortage of corn production, as a fresh batch of corn would planted in 2013. This means that companies like Agrium, CF Industries, and Mosaic (NYSE: MOS) that cater to the corn producing farmers, will be busy updating their order books, which eventually could bring major stock appreciation. For this reason major investment banks, including Barclays, have upgraded the fertilizer companies to overweight.
In March, 2012, Agrium Inc. announced that it has signed an agreement under which it will be acquiring a major stake of 90% in Viterra Inc. from Glencore International (LSE: GLEN). Agrium Inc will take control of Viterra agricultural products business in the coming months. In 2011, Glencore International’s Viterra Inc. revenues stood at $2.41 billion.
It was also released that Agrium will be buying a minority stake in nitrogen fertilizer plant in Alberta, Canada. CF Industries happens to be the majority stakeholder of that plant with a 66% stake.
The company reported record profits this quarter. There was a 10.3% increase in revenues, compared to the quarter last year, bringing the figure to about $6.83 billion. Profit surged 19.8% beating the street’s estimates. The EPS came out to be $5.44 compared to an estimated $5.36 and $4.54 in the last year’s quarter. Sales rose to $5.2 billion, up 12% compared to last year in the same quarter. The company expects the agricultural production to dip in 2012, and kick back again in 2013.
Talking about the fundamental ratios, the stock trades at 9.8x P/E and 1.73x PEG, which does not make it undervalued. The company yields 1% dividend and pays out 7% of its profits. The net profit margin is around 9.75% and the gross profit margin hovers around 27%. The EPS growth expected by analysts for the current year stands out at 106.3%, which means that the stock can bring staggering returns by this year’s end.
Agrium Inc. has been a star performer all along, a wonder stock some may call it. The shares have risen 49% YTD and 118% over the past three years. Agriculture industry is one industry that hardly sleeps and this company seems to be stealing the thunder of its peers. This stock has been topping analyst’s expectations and surging ahead from a couple of last quarters and from what it looks like, the drought in the US has made sure to an extent, that a bright year lies ahead. Also the stock was upgraded to overweight in a number of research reports and I am totally in accord with that. The outlook for the company is positive and with higher than normal prices of crops, due to a fall in the agricultural production, this stock is sealed with a buy rating.
PiyushArora has no positions in the stocks mentioned above. 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.If you have questions about this post or the Fool’s blog network, click here for information.