Agrium (AGU) Poised for Growth on Retail Business Strength

On Aug 27, we issued an updated research report on the fertilizer maker Agrium Inc. (AGU). While the company should gain from strength in its fast-growing retail business, it remains exposed to a soft wholesale pricing environment.

Agrium's revenues and adjusted earnings for the second quarter of 2014, reported on Aug 6, topped Zacks Consensus Estimates. The results were driven by record sales in the core retail business that more than offset a double-digit decline in the wholesale franchise.

Revenues from the company’s Retail segment moved up 15% year over year to a record $6.4 billion in the quarter on contributions from the acquisition of Viterra Inc's agri-products business, better results in overseas operations and gains in the North American business.

Agrium, a Zacks Rank #3 (Hold) stock, stands to gain from overall strong fundamentals for the agriculture and crop input market. The company is expected to see strong demand for crop protection products through the balance of 2014, providing strong support to its retail business. Favorable crop prices have triggered a rebound in farmer sentiment, supporting demand for crop nutrients. Restocking by retailers is expected to drive demand in North America.

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 recent acquisition of a controlling stake in agriculture biotechnology company – Agricen – will expand the company’s offerings of advanced plant health technologies.

However, the pricing environment is expected to remain soft in the wholesale business. Nitrogen prices may remain under pressure due to Chinese export supplies. While phosphate import is expected to improve in India (a major import market) in 2014 compared with 2013, uncertainty remains on timing and scale of import.

Agrium also faces challenges in form of transportation bottlenecks and plant outages. The unplanned outage at the company’s Carseland plant cut nitrogen volumes in the second quarter and hurt profits for the business. Outage at the Vanscoy potash mine due to a mechanical failure in the main hoist system is expected to have a $40 million negative impact on gross profit in the company's potash business in second-half 2014.

Other Stocks to Consider

Other companies in the basic materials sector worth considering are Green Plains Inc. (GPRE), Yara International ASA (YARIY) and Potash Corp. of Saskatchewan, Inc. (POT). While Green Plains retains a Zacks Rank #1 (Strong Buy), both Yara International and Potash Corp. hold a Zacks Rank #2 (Buy).