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Will Nitrogen Keep Agrium on Top?

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Fertilizer maker Agrium (NYSE: AGU  ) not only performed well in its first quarter, unlike peers PotashCorp (NYSE: POT  ) and Mosaic (NYSE: MOS  ) , but also gave an outlook that was brighter than theirs. So what gives?

It's a particular nutrient that's doing the trick for Agrium, one that I believe will also stand the company in good stead for the rest of the year.

King nitrogen
Companies dealing in nitrogen have generally performed better than those focused on potash or phosphate, as evidenced by their latest quarterly numbers.

CF Industries (NYSE: CF  ) , which is the largest producer of nitrogen in North America, is probably the best example. A 37% jump in its nitrogen division sales helped offset flat phosphate division revenue in its first quarter, taking the company's top line to record first-quarter highs. First-quarter revenue at CVR Partners (NYSE: UAN  ) , which deals only in nitrogen-based nutrients, too climbed 36% because of higher volumes and prices.

Now consider PotashCorp's contrasting performance. A 50% slump in first-quarter volumes in its largest segment -- not surprisingly, potash -- pulled its top line down by 21%. Likewise, lower potash volumes prevented Mosaic's top line from moving up last quarter. Things weren't that great with phosphate, either. The reason: low prices.

Nitrogen is clearly proving to be more profitable than other nutrients. In fact, its demand has risen at a much faster pace than others in the past two decades. Agrium is thus at an advantage since it derives a major chunk of its revenue from nitrogen.

Double advantage
Agrium, through its wholesale division, sells more nitrogen than both potash and phosphate put together. Even in its retail division (which is also its largest), crop nutrients, particularly nitrogen, contribute the most to its top line. Sales in this division jumped 35% to hit record first-quarter highs thanks to soaring nitrogen volumes and prices.

Favorable industry developments recently make me positive about the near future. U.S. corn plantations could hit record highs this year, which is great news as corn requires the largest amount of nitrogen. I'd keep an eye on the second quarter in particular, when the planting season is in full swing.

Agrium, in fact, has a double advantage, with natural gas prices having plummeted to decade lows. Gas being a key input for nitrogen fertilizers, Agrium saved quite a bit by paying $3.11 per MMBtu during the first quarter, compared with $3.90 per MMBtu in the year-ago period.

Potash to pitch in
Things are looking better on the potash front, too. Agrium is a part of the three-member legal cartel, called Canpotex, which handles all potash exports out of Saskatchewan. The group recently bagged a contract from China after a lull. Although India, an important potash market, hasn't signed any fresh contracts yet, I don't think it will take too long to come through, because the nation depends largely on imports to meet its huge potash requirements.

The Foolish bottom line
As the largest direct-to-grower retailer in the Americas, Agrium even sells stuff like seeds and crop-protection products, which means it has more revenue streams to bank on than most peers. The company is about to get even bigger in Canada once it takes over Viterra's agri business.

Having earned a coveted five-star ranking from our Motley Fool CAPS community, Agrium deserves to be a part of your personalized stock Watchlist -- and you can add it right now!

Of course, despite its five-star rating, Agrium may not be your top choice. We've compiled a special free report for investors called "Secure Your Future With 9 Rock-Solid Dividend Stocks," which uncovers several other juicy income opportunities. The report is 100% free, but it won't be around for long, so check it out while you can.

Fool contributor Neha Chamaria owns no shares of any of the companies mentioned in this article. The Motley Fool owns shares of CF Industries Holdings. Motley Fool newsletter services have recommended buying shares of PotashCorp. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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5/27/2016 4:02 PM
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