On Feb 26, we issued an updated research report on the fertilizer maker Agrium Inc. AGU. While the company is well-placed to gain from strength in its retail unit, it remains exposed to a soft crop-pricing environment.
Agrium's revenues and profit slipped year over year in the fourth quarter of 2014, reported on Feb 23. Sales fell due to a double-digit decline in the wholesale business, hurt by facility outages. Both revenues and adjusted earnings missed expectations.
Agrium, however, provided healthy earnings guidance for 2015. The company expects that growers will opt for genetic seed offerings and use crop nutrients and crop protection products to maintain crop yield.
Agrium stands to gain from overall strong fundamentals for the agriculture and crop input market in the long haul. The company is expected to see healthy demand for crop protection products, providing strong support to its retail business. Roughly 90 million acres of corn are expected to be planted in 2015, thereby driving the demand for crop nutrients.
Agrium also follows a strategy to grow along the value chain through a combination of acquisitions and organic development. The acquisition of Viterra's agri-products assets is an excellent fit to Agrium's portfolio, allowing it to offer highly competitive products, services and technologies. Moreover, the buyout of a controlling stake in agriculture biotechnology company Agricen reinforces the company's offerings of advanced plant health technologies.
Agrium also remains committed to boost shareholder returns. The company has raised its quarterly dividend by 4% to 78 cents per share. It now aims to return 40%-50% (up from 25%-35%) of its free cash flow to shareholders.
However, the crop pricing environment is expected to remain soft in the near term which may continue to unfavorably impact the crop input market. Moreover, demand environment for potash is still somewhat uncertain in India, a key market. Depressed subsidy levels coupled and weak local currency are expected to continue to weigh on demand in that country.
Agrium also is also faced with issues such as logistical constraints and plant outages. Outage at the Vanscoy potash facility due to a mechanical failure had a negative impact on potash gross profit and production volumes in the fourth quarter. Moreover, Turnaround at the company’s Redwater nitrogen facility also impacted results in the wholesale unit.
Other Stocks to Consider
Other companies in the fertilizer space with favorable Zacks Rank include Yara International ASA YARIY, CF Industries Holdings, Inc. CF and The Mosaic Company MOS. While Yara holds a Zacks Rank #1 (Strong Buy), both CF Industries and Mosaic retain a Zacks Rank #2 (Buy).
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