+ Watch AGU
on My Watchlist
The Company is a retailer of agricultural products and services in the United States and Argentina and a global producer and wholesale marketer of nutrients for agricultural and industrial markets.
I believe Agrium Inc. should continue to do well over the next few years. We are currently seeing the beginnings of a large macro-economic and demographic shift in that the peoples of China and India are moving up into the middle class in droves, a shift that could last a decade or more. One of the big factors driving this trend is the infusion of money by their respective governments into cities, factories, infrastructure, etc., which has effectively sent out The Piped Piper to collect many laborers from the countryside and bring them into the cities. There, the demand for workers is temporarily sated, exchanging opportunity for wealth and upgrading the poor into the middle class. This transformation generally improves their lifestyles, which includes eating better (and simply eating more), as well as seizing opportunities for better education, better housing, and mild luxury items like cars, jewelry, TVs, vacations, plays/movies, etc., as well as freeing up time for that entertainment and travel.Agrium will play an important role in this growth of a new middle class because eating better translates to eating more meat. A bigger demand for meat means higher demands for grain to feed the cattle/chicken/yak/yeti or rack du jour. The problem is a shortage of grain is threatening this growth (ethanol, anyone?), and most of the easily adaptable & reachable lands in the world are already producing what food & grains they can.Enter Agrium (and Potash, Monsanto, Terra Industries and others). Its forte is the production of agricultural nutrients (sulphur, nitrogen, nitrates, phosphates, potash) and specialty products (herbicides, insecticides, fungicides) to improve crop output and fight pests. Fertilizers are the quickest, most efficient method for improving a farm’s yield, and farmers the world over know this (or they should). They will gladly pay up for products and services provided by the likes of Agrium first, rather than layout even more capital, equipment, time & labor in securing additional lands to farm. It only makes sense to do so, in this order.So, AGU is definitely in the right business to prosper from a global trend. But does it have the financial muscle to keep up with this demand? Looking at their numbers on Yahoo! Finance, I think they do. I see a low PEG ratio of only 1.03 (a very good number), a Trailing P/E of 20.5, a Forward P/E of 11.1 (implying good earnings growth from this point forward), decent margins on Profit and Operating (11.65% & 16.45%, respectively), good Returns on Assets (11.2%) and Equity (28.5%), and a healthy 34.8% year-over-year growth in quarterly revenue. These are all very good numbers. Additionally, its operating cash flow is 5.5% of its Market Cap, which is higher than POT (2.7%) and MON (at 4.5%). Comparing these numbers to POT and MON, it looks like the smaller Agrium should be able to fare well.The only flies in the ointment I see are: (1) its debt load is slightly higher (at 29.2% of equity) than its competitors; and (2) it is currently running with a negative leveraged cash flow. I think the latter problem will be erased as Agrium is coming off a bad year in 2006 (from what I can tell from the 2006 numbers), but did much better in 2007, and is poised to do even better in 2008. Indeed, the earnings estimates have this quarter’s earnings shooting up to $2.52/share, up from $1.70/share in June/2007 (SOURCE: Motley Fool). That’s a stunning 48% increase in EPS for the same quarter, year-over-year. Next quarter’s increase (for Sept/2008) is estimated to be over 170% that of Sept/2007. For the year, the EPS target is set at $6.75 versus $3.59 in 2007, a stunning 88% increase. Clearly, these are expected to be good times for anyone who can deliver the goods quickly and efficiently. Yet, with a PEG of only 1.03, a lot of people on Wall Street have not seen this disparity (yet).I think Agrium will be able to deliver the goods efficiently, and hopefully do it over the long haul. However, because I’m relatively new to the fertilizer industry, I’m going to put a short lease on my Time Frame here, leaving it at just 3 months. I’ll check it again after that time and probably extend that frame outlook from there.
Additionally, AGU was a SmartMoney pick in their May 2008 issue, page 42. They note: "At 13 times 2009 earnings, Agrium trades at a discount to Potash's 19 times and Mosaic's 17 times. CIBC World Markets analyst Jacob Bout says he thinks the discount is partially due to some disappointing quarterly earnings over the past few years. But recent results have been strong, and Bout expects Agrium's multiple to expand over the next 12 months due to strong grain and fertilizer prices. He sees the stock going to $80."
Ha, forgot to include in that last post this observation: note how late hard paper media (like SmartMoney magazines) are to the party in this "online universe". The stock had already pushed past $80/share before May even began! Magazine article authors and editors are highly reluctant to give you times & dates for their articles because it highlights how long their print cycle is. In the past, I've estimated that Money magazine is about 6-7 weeks behind, and that's for paying subscribers who get their rags delivered to their mailbox about a week before it hits the store shelves. This was one of the reasons I'd cancelled my Money magazine subscription years ago. That, and the fact that their analysts were more often wrong than right when they did happen to give any detail worth noting. So far, SmartMoney has kept a better pace with me, although they are clearly behind online media too, as this faux pas points out. It appears that SmartMoney articles would be at least 4 weeks behind (my guess is that the above analyst made these remarks in mid- to late-March, and I didn't get the magazine until mid- to late-April).
For what it's worth, Agrium is a (moderately aggressive) "new buy" in Navellier's Blue Chip Growth newsletter of July (came out in electronic form about a week ago) and an "A" rated stock in his Portfolio Grader. He has also added Syngenta (SYT - a Swiss agribusiness) to his "Top 5" for July.
The cycle that just ended is making a lot of people claim the fertilizer stocks are doomed. I wouldn't believe them. Over the past year about every 3 months this stock goes through a cycle and it drops around 20%. Looking at the other potash producers history, no history for IPI, I found they all cycle about the same time and have similar 20% drops. After these cycles they have broken the 52 week high. If you play these cycles you can make money.
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