Agrium, Inc. (USA) (AGU)

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.