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, then decide if 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.
  • Money-making 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% 29.8% Pass
  1-Year Revenue Growth > 12% 47.1% Pass
Margins Gross Margin > 35% 28.0% Fail
  Net Margin > 15% 8.9% Fail
Balance Sheet Debt to Equity < 50% 36.8% Pass
  Current Ratio > 1.3 2.08 Pass
Opportunities Return on Equity > 15% 25.6% Pass
Valuation Normalized P/E < 20 10.17 Pass
Dividends Current Yield > 2% 0.5% Fail
  5-Year Dividend Growth > 10% 20.5% Pass
       
  Total Score   7 out of 10

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

Since we looked at Agrium last year, the fertilizer make has seen a huge three-point gain in its score. Boosts in returns on equity and a big dividend hike combined with more reasonable valuations to account for the increase.

As part of the Canadian Potash Exporters group along with PotashCorp (NYSE: POT  ) and Mosaic (NYSE: MOS  ) , Agrium enjoyed a strong 2011. Deals with China and India at attractive rates helped power the company's profits, although that growth may slow in the near term as India works through a backlog of fertilizer inventory.

The fundamentals of the agriculture business continue to point toward better results for Agrium and its peers. Nitrogen-based fertilizer makers CF Industries (NYSE: CF  ) and Terra Nitrogen (NYSE: TNH  ) predict huge plantings of corn this year. As a mined product, potash is costlier to produce than nitrogen fertilizers, which explains why Agrium's margins are relatively low compared to CF's.

Still, Agrium beat expectations on both revenue and earnings for the fourth quarter of 2011. Last week, the company announced that it would expand its Missouri plant to boost capacity. That's just another sign of how, at least for now, trends are moving Agrium's way, and continued strength in the agricultural sector should keep the company moving toward perfection -- and sustain the stock well into the future.

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.

Agrium isn't perfect yet, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

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

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of CF Industries. 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 Fool has a disclosure policy.


Read/Post Comments (2) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 05, 2012, at 10:35 AM, wwmcn wrote:

    Agrium, I think, differs from most of the other major fertilizer stocks in that not only are they a miner/manufacturer, but they extend vertically into retail fertilizer, pesticides, seeds, turf, and services including applications of fertilizer and pesticides, through their Crop Production Services outlets over the US and Canada. This subjects them to less volatility than competitors not into the retail and services business. Look at the www.cpsagu.com to learn more about that end of the business. I'm a farmer, and use and like their services.

  • Report this Comment On March 24, 2012, at 3:40 PM, papageorgio123 wrote:

    Agriculture fundamentals remain strong but J.P. Morgan is hedging its bets on fertilizer with a downgrade to Agrium Inc.

    Meanwhile, it’s maintaining a bullish outlook on Potash Corp. of Saskatchewan Inc. and Mosaic Co., said analyst Jeffrey Zekauskas in a note Wednesday morning.

    It’s Agrium’s exposure to nitrogen that has J.P. Morgan worried, he said, noting that nitrogen has a much more fragmented industry structure while the outlook for potash and phosphate remain attractive.

    “We view nitrogen fertilizer prices as being at greater risk of negative change in an environment in which large parts of the global nitrogen fertilizer industry are profitable in a context in which demand may come under pressure due to economic factors,” Mr. Zekauskas said.

    He noted that particularly in North America, the nitrogen business has been solidly profitable due to a wide spread between domestic natural gas prices and gas prices paid by offshore marginal producers.

    But, he said, “The recent step down in global energy prices could mark a point of peak profits for North American nitrogen producers.”

    In general, he noted that the industry remains on solid footing.

    “Agriculture fundamentals within a general economic context seem much more firmly grounded than they were in 2008,” he said. “It is difficult to imagine the economic slowing of the latter half of 2011 becoming an event on the order of the economic contraction of 2008-2009.”

    Agrium is still attractive due to its large retail presence in North America and expansion in Australia and Europe, as well as its potash production, he said. But given its emphasis on nitrogen, he prefers other fertilizer companies at this time.

    While he maintained Overweight ratings for Potash Corp. and Mosaic, Mr. Zekauskas knocked his rating on Agrium down to Neutral (from Overweight) and lowered his price target to US$89.00, down from US$105.

    However, he did up his 2011 earnings per share forecast for the company to US$9.50 from US$7.45.

    Shares of Agrium closed at US$83.17 on Tuesday.

Add your comment.

DocumentId: 1800159, ~/Articles/ArticleHandler.aspx, 8/2/2014 12:32:30 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement