On Aug 20, we retained our Underperform recommendation on leading fertilizer company Agrium Inc. (AGU). Our view reflects continued weak phosphate price environment, weak demand in India and uncertainties in the potash market.
Why Retained?
Agrium’s profit for second-quarter 2013 (reported on Aug 7) fell by double digits, hurt by cold weather in North America and pricing pressure. However, both revenues and adjusted earnings beat Zacks Consensus Estimates. The company witnessed higher retail sales in the quarter. But weak global demand and pricing continued to hurt its phosphate business.
Earnings estimates for Agrium are declining following the release of second quarter results. The Zacks Consensus Estimate for 2013 has gone down roughly 4% to $9.01 per share. The Zacks Consensus Estimate for 2014 has also declined roughly 7% to $9.02 per share. With Zacks Consensus Estimates for both 2013 and 2014 going down, Agrium now has a Zacks Rank #5 (Strong Sell).
While Agrium may benefit from high crop prices and overall strong fundamentals for the crop input market, demand for potash and phosphate is expected to be weak in India, a key market. Changes in pricing and subsidy policies by the Indian government are expected to continue to affect demand in the country.
Moreover, the pricing environment for phosphate is expected to remain soft in the near future. The global phosphate market is expected to remain weak, partly due to lower demand from India (a major phosphate import market). Phosphate import is expected to decline in India in 2013 and the next year due to the change in subsidy and currency devaluation.
We also account for significant uncertainty in the potash market following the recent exit of world's largest potash maker Uralkali Group from one of the biggest potash cartels – the Belarus Potash Company (BPC). Uralkali’s move has triggered industry-wide fear of a price war which may push potash prices down and put significant pressure on fertilizer makers.
Other Stocks to Consider
Other companies in the basic materials sector with favorable Zacks Rank are Ferro Corp. (FOE), KMG Chemicals Inc. (KMG) and Sensient Technologies Corporation (SXT). While Ferro retains a Zacks Rank #1 (Strong Buy), both KMG Chemicals and Sensient Technologies retain a Zacks Rank #2 (Buy).
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