Agrium Inc’s Diversified Business Model Offers Protection

Agrium's high yield and diversified operations make it a buy.

May 12, 2014 at 4:00PM

A colder than usual winter and a decline in nutrient prices have severely hit the profits of fertilizer companies, including Potash Corp (NYSE:POT), Agrium (NYSE:AGU), and Mosaic (NYSE:MOS).

While the fertilizer sector is already under pressure since the breakup of the Belarusian Potash Company (BPC) last summer, which led to steep decline in prices, transportation problems during the unusually cold winter only added to the headaches of the industry. Despite these challenges, Agrium's diversified business model compared to its North American peers protects it from broader agriculture market headwinds in 2014.

Earnings beat despite negative preannouncement
Following the company's negative preannouncement in April, Agrium's quarterly results provided little relief to investors. A late spring season, logistical challenges, plant operational issues, and lower fertilizer prices all negatively affected the company's quarterly results. 

Agrium reported first quarter operating EPS of $0.07, beating consensus estimates of $0.05 by 40%. Despite the seasonal and operational challenges, the results came in much better than the consensus estimates and last month's preannouncement, when Agrium said it expects first quarter earnings of "just above breakeven." 

More than the quarterly results, it's the second quarter guidance that attracted investors' attention. The company expects second quarter EPS to be in the range of $3.85-$4.35, below the adjusted consensus estimates of $4.87. However, the range includes an estimated $0.35 impact from lower production and higher costs related to the boiler problems at Carseland. I think it is quite likely that the management team is being conservative and setting low expectations in an uncertain agriculture environment.

Strong retail business
While the company's wholesale business is expected to remain challenged until year-end, due to an extended turnaround at the Redwater plant in the third quarter and downtime at Vanscoy as part of the expansion program, the retail segment continues to post encouraging results. 

Agrium's international retail business, one of the weaker businesses since the company purchased Landmark in 2010, performed better in the quarter with record results in Australia. The segment's international profitability increased more than 6% year over year and working capital is showing a smaller-than-normal seasonal build, increasing confidence in Agrium hitting 2015 retail targets.

Going forward, the company's Viterra acquisition in particular should help 2Q/3Q results within retail, which is another reason to believe management is perhaps being conservative in its guidance.

Capital projects to support organic earnings growth
A number of capital projects, including Vanscoy, Borger, and MOPCO, in Agrium's whole business are set for completion over the next 12-18 months, supporting organic earnings and free cash flow growth into 2016. The company's Borger expansion, which will add a new urea production unit of about 610,000 tons, is on budget and set to start by the end of 2015. Moreover, the expansion program at MOPCO in Egypt has also restarted following an extended shutdown. Agrium has 26% ownership stake in MOPCO. The company expects the first expansion to come online by year-end, with the second phase operational in 2015, in total resulting in another 340,000 tons of urea attributable to Agrium. 

Locked in attractive margins
Agrium has locked in roughly 20% of its natural gas needs during 2016-2018 at $3.50 per mmbtu, which is $1.50 or 30% lower than the average gas price paid in the first quarter. This is a solid operational decision to secure cheap feedstock, which will help de-risk the company's Borger, Texas expansion. Well executed long-term gas hedges coupled with industrial nitrogen contracts, which have a fixed margin, have helped AGU lock in attractive margins for about a third of its North America nitrogen business.

Bottom line
Agrium is a global leader in farm retailing. While the company's wholesale business continues to face challenges in 2014, the company's diversified business model protects it from the broader agriculture market headwinds in 2014. As the new projects come online, the company's 2015 and 2016 prospects particularly look bright. Meanwhile, the continued rationalization of the company's retail footprint across North America should continue to enhance operating performance and working capital improvements throughout the balance of 2014.

The expectations for material improvements in Agrium's retail business remain fairly low, which I believe in the intermediate to long-term will be a key driver of the stock, particularly when wholesale's operational issues are behind Agrium. In the meatime, the company's high dividend yield of 3.2% should keep investors interested.

Warren Buffett just bought nearly 9 million shares of this company
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report details this company that already has over 50% market share. Just click HERE to discover more about this industry-leading stock... and join Buffett in his quest for a veritable landslide of profits!


Jan-e- Alam has no position in any stocks mentioned. The Motley Fool owns shares of CF Industries Holdings and PotashCorp. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers