In a recent article, I highlighted a group of fertilizer companies and looked at some of their strengths and weaknesses. We found that as a whole, the fertilizer industry is strong and positioned for fantastic growth over the next few years. Despite being a commodity industry, where every company's products are essentially the same, these companies find ways to differentiate themselves and find their own competitive advantages. Now we can go into a little more depth, starting with Agrium
Agrium is a large fertilizer company, but it is by no means a PotashCorp
The prominence of Agrium's retail operations should not overshadow its basic fertilizer operations (covered in the wholesale segment), though. The global potash market is largely controlled by two consortiums, Canpotex and Belarussian Potash Company. Canpotex is essentially a legal cartel that controls all potash exports out of Saskatchewan, and 54% is owned by PotashCorp, 37% by Mosaic
Agrium operates a third segment, advanced technologies, which offers specially formulated slow- and controlled-release plant nutrients for various uses like agriculture and consumer lawn care. These value-added products are designed to increase crop yields and be more environmentally friendly.
The competitive advantage
Astute readers will point out that in my last article, I panned Agrium for focusing on retail, where revenue growth may outpace wholesale but narrower margins negate some of that benefit. It's true -- Agrium could be earning more if it focused on whatever segment was currently most profitable, and its wholesale segment is too diluted by retail and advanced technologies to be a good "pure play" on fertilizer.
But that doesn't mean Agrium's multipronged approach has no advantages. Within wholesale, rather than focusing almost solely on one fertilizer chemical -- the way CF Industries
This strategy allows Agrium to be somewhat more nimble than its competitors. Right now, natural gas -- the primary cost of producing nitrogen -- is relatively cheap, so wholesale leans slightly toward nitrogen. Should the fundamentals change, Agrium could shift its product mix accordingly, while competitors like CF Industries would have more trouble adjusting.
Similarly, though fertilizer prices have recently skyrocketed, they've fallen from their 2008 highs. PotashCorp and Mosaic, which are dependent on high fertilizer prices, have seen their revenues fall accordingly. However, blistering growth in Agrium's retail business, even at lower margins, has cushioned it against declines in basic fertilizer sales. The market doesn't seem to have recognized this, as PotashCorp carries a 6.39 price-to-sales ratio, compared with Agrium's relatively cheap 1.13.
And while the saying goes that a jack of all trades is a master of none, Agrium earns a higher margin on all three of its wholesale fertilizers than many of the top producers of each, despite selling the same fungible resource. Agrium's retail business grows revenue faster than retail competitors like Lowe's
Agrium's business is moving rapidly, and while certain segments may be more profitable than others at times, its generalist approach keeps the overall business stable. Despite the size and strength of its specialist competitors, Agrium brings serious game to the table, making it one of my top picks in the ag space.