Is Agrium a Buffett Stock?

As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands try to glean what they can from his thinking processes and track his investments.

We can't know for sure whether Buffett is about to buy Agrium (NYSE: AGU  ) -- he hasn't specifically mentioned anything about it to me -- but we can discover whether it's the sort of stock that might interest him. Answering that question could also reveal whether it's a stock that should interest us. In this series, we do just that.

Writing in his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:

  1. Consistent earnings power.
  2. Good returns on equity with limited or no debt.
  3. Management in place.
  4. Simple, non-techno-mumbo-jumbo businesses.

Does Agrium meet Buffett's standards?

1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.

Let's examine Agrium's earnings and free cash flow history:

Source: S&P Capital IQ.

Agrium's earnings have fluctuated pretty dramatically with the global economy, falling in the 2009-2010 period because of tight international credit, deflation in commodity prices, and lower demand for fertilizer. They have, however, rebounded significantly.

2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it is.

Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.

Company

Debt-to-Equity Ratio

Return on Equity

5-Year Average Return on Equity

Agrium 41% 24% 16%
CF Industries 34% 33% 31%
Mosaic 7% 26% 23%
PotashCorp 61% 38% 32%

Source: S&P Capital IQ.

Like the rest of the fertilizer industry, Agrium generates fairly high returns on equity while employing reasonable levels of debt.

3. Management
CEO Michael Wilson has been at the job 2003. Before that he was its chief operating officer for three years. He'd been an executive at Dow Chemical for about two decades.

4. Business
Fertilizer production isn't particularly susceptible to technological disruption.

The Foolish conclusion
So is Agrium a Buffett stock? Possibly. Buffett might not be too keen on the company's economic sensitivity. But it is interesting to note that Agrium exhibits some of the other characteristics of a quintessential Buffett investment: fairly high returns on equity with limited debt, tenured management, and a straightforward business. To stay up to speed on Agrium's progress, simply add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks by clicking here.

Ilan Moscovitz doesn't own shares of any company mentioned. You can follow him on Twitter @TMFDada. 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.


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  • Report this Comment On January 03, 2012, at 11:16 AM, buffalonate wrote:

    I don't believe Buffett would be very interested in this stock. It is definitely in a growth industry but there isn't much of a moat around this company. Essentially they are selling commodities. He wants to own companies that you can buy and forget about because he knows the economic moat is large enough that they will still be around in 20 years.

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