What's Working in Agrium's Favor?

Agrium (NYSE: AGU  ) is upbeat about 2012. The fertilizer maker is expecting its earnings for the first half of the year to hit the top end of its guidance. But is the company totally free from weaknesses? No company is perfect, and only close scrutiny can give us a clear picture. Let's take a look at where Agrium stands.

Strengths

  • Nitrogen: More than a third of Agrium's earnings comes from nitrogen, a nutrient that has proved to be more profitable than potash or phosphate. That's why Agrium's numbers from last quarter were much better than those of peers Mosaic (NYSE: MOS  ) and PotashCorp (NYSE: POT  ) , which focus more on the other two nutrients.
  • Diversity: As the largest direct-to-grower retailer in the Americas, Agrium also sells stuff like crop-protection products, and seeds which means more revenue streams to bank on than its peers have.
  • Canpotex: Agrium is the third-largest stakeholder in Canpotex after PotashCorp and Mosaic. Since the legal cartel controls all potash exports out of Saskatchewan, that's a big benefit. Agrium sells nearly half of its potash through Canpotex.
  • Prolific investments: Agrium has an impressive history of acquisitions -- 17 in the past seven years. The company is even investing in a $1.5 billion potash expansion program that will increase capacity by 50% once completed in 2014.
  • Financially sound: Agrium's cash balances as well as cash flows are well over $1 billion. The total debt-to-equity ratio is pretty low at 36.5%, and interest coverage stands at a high of 15.3. Consistent double-digit margins and a decent return on equity of around 25% are impressive, too.

Weaknesses

  • Low dividend: Despite a good financial position, Agrium pays out a mere 3.3% of profits as dividends and yields only 0.6% currently. This could be better.
  • Missing out on nitrogen: The company benefits from its focus on nitrogen, but while other nitrogen-centric peers like CF Industries (NYSE: CF  ) are aggressively pursuing profitable strategies such as upgrading more ammonia to urea ammonium nitrate, Agrium isn't. That may put its peers in a better position.

Opportunities

  • Corn: The USDA has predicted record U.S. corn plantings this year. If that comes true (and the chances are high), Agrium can look forward to a great 2012, as it deals in nutrients critical to corn.
  • Global demand: Growing populations and increasing food consumption, especially in populous countries such as China and India, open up great opportunities for Agrium's business.

Threats

  • Contract delays: India, an important buyer of potash, hasn't entered into any contract with Canpotex this year. Further delays could be a considerable blow to Agrium's top line.
  • Macro challenges: Agrium's performance depends largely on crop prices, which are fairly volatile. Lower crop prices and cautious buyer behavior even compelled some players to cut back production in the past few months, thus hurting sales.
  • Fierce competition: With most fertilizer players expanding in a big way, Agrium has to continuously ramp up efforts to stay in the race.

The Foolish bottom line
The pros clearly outweigh the cons in Agrium's case. Having earned a coveted five-star ranking from our Motley Fool CAPS community, Agrium deserves to be a part of your personalized stock Watchlist. Go ahead and add it -- the service is free to use.

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 won't be for long, so access it now.

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 and 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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