Fertilizer producers like Agrium (NYSE: AGU), Potash Corp ( POT ), and Mosaic ( MOS -0.66% ) were under pressure last year after Russian potash producer Uralkali broke its ties with Belaruskali and decided to follow the strategy of volume over price. While Potash Corp's and Mosaic's business is wholesale, Agrium has a strong retail segment. However, its stock is flat this year, while Potash Corp is up 2% and Mosaic is up 3%.
At first glance, this seems counter-intuitive, as diversification into retail should help Agrium outperform its peers while the wholesale segment is under pressure. However, there are several reasons why Agrium's shares could underperform this year in comparison with Potash Corp and Mosaic.
Fears already priced in for Potash Corp and Mosaic
Last year, Agrium was not hurt as bad as Mosaic and Potash Corp after the announcement of Uralkali's decision. Agrium's wholesale sales were $963 million in the fourth quarter, while retail sales were $2.1 billion. The fact that retail sales have a substantially bigger share in the revenue mix helped Agrium's shares weather last year's storm.
However, the same fact could be holding Agrium's shares down this year. Both potash and nitrogen prices seem to have found their respective floors. In addition, Potash Corp and Mosaic grew their potash sales in the fourth quarter, while Agrium's sales were flat in comparison with the third quarter.
Agrium's retail segment looks strong, but it lacks catalysts for big growth in the near term. On the other hand, the possible rebound in potash and nitrogen prices could provide significant benefits for fertilizer companies. Agrium has less exposure to the wholesale market, so it will have less upside than Potash Corp and Mosaic in case the rise in prices actually happens.
Lack of support from the buyback program for Agrium
Agrium is authorized to buy back as much as 1.7 million shares. During the recent earnings call, the company stated that it was not actively involved in the program so far. Agrium is focused on its growth projects like the Vanscoy potash expansion. The costs for this project are already projected to be 25% higher than expected due to severe winter and lower than expected construction productivity.
Agrium plans to spend $1.7 billion-$1.8 billion on capital expenditures in 2014. Given the prolonged weakness in fertilizer prices, the company could refrain from buying its own stock in order to finance its capital spending.
On the other hand, Potash Corp has an active $2 billion repurchase program in addition to its hefty 4.21% yield. Mosaic recently approved a new $1 billion buyback program. When made in the open market, share buybacks directly support stocks.
In my view, Agrium's shares could lag its peers this year. If positive surprises happen, they are likely to happen on the wholesale front. The prices seem to have settled and could be ready for a rebound later this year. The recent tension in Ukraine could also help fertilizer prices, especially if economic sanctions are imposed on Russia.
Agrium has less exposure to the wholesale segment, which limits its upside potential in case of positive surprises on the price front.