Has Agrium Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock and then decide whether Agrium (NYSE: AGU  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Moneymaking opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Agrium.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-year annual revenue growth > 15%

25.9%

Pass

 

1-year revenue growth > 12%

7.9%

Fail

Margins

Gross margin > 35%

26.9%

Fail

 

Net margin > 15%

9%

Fail

Balance sheet

Debt to equity < 50%

57.2%

Fail

 

Current ratio > 1.3

1.54

Pass

Opportunities

Return on equity > 15%

22.4%

Pass

Valuation

Normalized P/E < 20

12.94

Pass

Dividends

Current yield > 2%

1.9%

Fail

 

5-year dividend growth > 10%

55.5%

Pass

       
 

Total score

 

5 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Agrium last year, the company gave back two of the three points it gained from 2011 to 2012, as revenue growth slowed and debt-to-equity rose. But the shares have done quite well, rising almost 30% over the past year.

Agrium gives investors the best of both worlds in the fertilizer industry. As part of a three-company consortium alongside PotashCorp (NYSE: POT  ) and Mosaic (NYSE: MOS  ) , Agrium benefits when potash-based fertilizers are performing well. But unlike PotashCorp and Mosaic, Agrium also has nitrogen-based production capacity, which has come in especially handy recently because of extremely low natural-gas prices that make it cheaper to produce nitrogen-based fertilizers than other fertilizer types. Those conditions have given Terra Nitrogen (NYSE: TNH  ) andCVR Partners (NYSE: UAN  ) , as well as Agrium, a competitive advantage over pure potash producers. Moreover, Agrium has its own retail outlets, giving farm customers a face to put with its products.

On the potash side of the business, Agrium recently agreed to a deal with China's Sinofert to send potash fertilizer to the emerging-market nation. The contract gave Sinofert a good deal from a price standpoint, but it also will help Agrium and its peers sell off excess potash inventory in preparation for the next upward move in price for the commodity.

In its most recent quarter, Agrium topped estimates, posting all-time highs in net earnings on a roughly 2.5% gain in revenue. Yet the results haven't appeared to assuage hedge-fund investor JANA Partners, which has asked its fellow Agrium shareholders to vote in a slate of directors that it has chosen at its coming annual shareholder meeting. The company has moved up its annual meeting by a month, and with allegations going back and forth between JANA and Agrium over their respective intentions, the meeting is sure to be contentious.

For Agrium to improve, it needs to continue with its aggressive dividend payout increases and work on getting its balance sheet back in order. With favorable conditions in the agriculture industry persisting, Agrium has plenty of chances to get closer to perfection in the years ahead.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Are prospects for potash fertilizers improving? Find out in our premium research report on PotashCorp, in which we examine the global leader in potash production to see if it's worth buying right now. The report covers precisely what barriers to entry exist in the industry and detail several other key reasons why this company presents such a compelling investment opportunity today. Click here now to access your copy right now.

Click here to add Agrium to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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