Agriculture Stock on High Heels
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
“Ignore the crowd” – this is the slogan of Barry Rosenstein, the founder of Jana Partners, who has turned the tables at the Agrium Corporation (NYSE: AGU). In its 13-D filing Jana announced that it has increased its stake by 25% in Agrium and now holds a 6.19% stake in the company. Jana has emphasized that Agrium’s complicated business structure and mismanagement in operations, especially in retail, have been the major reasons for why Agrium is not able to operate at its full potential. Also, the earnings are not up to the mark due to the poor capital allocation.
Jana is now attempting to spin off Agrium’s retail business. It has also proposed five new members to the Agrium’s board of directors. Among the five candidates, three are corporate executives - David Bullock from Graham Packaging, Stephen Clark from Brenntag, and Mitchell Jacobson from MSC Industrial Direct. The other two are Lyle Vanclief, a former Canadian Agriculture Minister, and Barry Rosenstein, Jana’s founder.
The performance of Jana Partners in the successful business split of McGraw-Hill Companies (NYSE: MHFI) has been notable. After acquiring a substantial 5.2% stake in McGraw-Hill, Jana Partners pushed it to split their business segments into four separate companies as McGraw-Hill's education, information and media, financial, and S&P ratings service divisions. Finally, McGraw-Hill is selling off its education business to private equity firm Apollo Global Management for $2.5 billion, and the proceeds will be used for share buybacks and acquisitions.
Therefore, going forward, I don’t doubt any negative impact on Agrium’s performance with the involvement of new board members. Before going over to Agrium’s investment strategies, let’s have a competitive analysis with two of its closest rivals – Potash Corp. of Saskatchewan, Inc. and The Mosaic Company.
PotashCorp (NYSE: POT), the world’s biggest fertilizer maker, is facing demand and supply issues and had announced the closing of its mine in Allan and New Brunswick for eight weeks. But on the other hand, PotashCorp has now got approval from the government of Israel to increase its stake in ICL from 13% to 25%. The increased stake will benefit PotashCorp with its capacity expansion of up to ~17.1 million tons and give it the benefit of lower costs, around ~$90/t fob. Other than these positive signs, PotashCorp has recorded increased shipments in North America, with ~1 million tons in 3Q 2012, and further demand is expected from the top potash consuming countries (India and China). India, which, has reduced its inventory levels due to inflated prices, is expected to raise its demand levels.
Mosaic (NYSE: MOS) is also facing demand constraints from China and India, which are delaying their long term contracts with the company. The countries have cut their orders and demandew lower prices from the suppliers. Due to these reductions the company has lowered its potash and phosphate shipments. Other buyers have also postponed their purchases in expectation that the prices will be reduced. Consequently, the stock of the company has been down by over 9% over the last three months and is currently trading at $52.98.
Getting back to Agrium, I believe the company is well equipped with strong fundamentals from the Viterra Acquisition, and its Redwater Plant will support growing revenues.
The long awaited Viterra deal is expected to close in the first quarter 2013 after Glencore completes its takeover of Viterra. In a deal worth $575 million Agrium would acquire 90% of Viterra's Canadian retail facilities, the entire Australian retail facilities, and a 34% position in a new nitrogen plant in Medicine Hat, Alberta, Canada. It is a big push for Agrium, as it could have taken 10 more years to grow its business to this level in the absence of this deal. The deal will add retail network of 232 stores in Canada and 17 in Australia, enhancing Agrium’s limited presence in the West Canadian market, where it currently operates with 65 locations. With this acquisition Agrium will have 1,500 locations around the globe.
Agrium has short listed it expansion plans for the long haul. Included in it is an economically viable $150 million plant expansion of its nitrogen operations. The project would add up to the current daily plant capacity of 2100 tons output by 25%, adding 500 tons a day. The project seems to be having a good growth potential for Agrium, as in recent years natural gas prices in the U.S. have gone down steeply due to shale gas exploration. And looking at the growing demand reflected from the total North America imports of four million tons of urea, there is a huge potential in the market to eat up the production.
In conclusion, Agrium has planned its strategies in sync with the growing demand of the market. The retail segment, which contributes 70% to its total revenue, will further be benefited by the acquisition of Viterra, thus adding new stores. Besides this the Redwater Plant will add to its production capacity and match the supply demand ratio of the market. The recent initiatives by the company for a $900 million share buyback and doubling its dividend show that it has enough potential to generate incremental financials going forward, so I don’t see that Jana’s involvement in board will hurt in any way to the shareholders. Investors who are looking for an agriculture stock can consider this company, which is well above 40% year to date and has a forward P/E of 10.13.
ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool owns shares of The McGraw-Hill Companies. 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!