The November bidding war for Potash Corp of Saskatchewan (POT: Charts, News, Offers) showed the world how highly valued fertilizer is, in the face of rising food demand and the increased production of biofuels such as ethanol. As Australia, China and Canada battled it out to control the world’s potash fertilizer price, a smaller Canadian fertilizer producer, Agrium (AGU: Charts, News, Offers), with its $12.6 billion market cap, went unnoticed. However, Agrium’s stock recently rocketed to 52-week highs as investors turned their full attention to commodity-related stocks. What makes this unfamiliar name, which has risen 84% this past year, such a lucrative investment?
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Agrium’s main product is nitrogen fertilizer, which is produced through the use of natural gas, which makes up 80% of its manufacturing cost. Natural gas prices have plunged 50% since 2008, due to the “shale gas rush” in Louisiana, Pennsylvania and Texas fields, fueled by large oil companies such as ExxonMobil’s (XOM: Charts, News, Offers) XTO Energy and Chevron’s (CVX: Charts, News, Offers) Atlas Energy, both of whom have been rushing to find alternative revenue streams aside from their oil businesses. The decline of natural gas prices will increase the company’s margins substantially, and Agrium’s proximity to the saturated market gives it a competitive edge over its international competitors, due to the cost and difficulty of transporting natural gas. In fact, its European competitors in nitrogen fertilizer pay twice as much for natural gas.
Agrium’s other strength is diversity – often times commodity stocks rise and fall quickly due to the underlying asset cost, but Agrium also operates 1,200 farm product stores across the United States, Argentina, Chile and Uruguay. Its farm product business is stable and has higher margins than its nitrogen fertilizer business, and serves as a diversifying counterbalance to stabilize its business. It is also a form of vertical integration for the Calgary-based company; farmers who use Agrium’s fertilizer products will more likely purchase Agrium’s farm products.
In addition, it is well positioned to capitalize on the Emerging Markets of Latin America, where fuel independence and rising standards of living will fuel the demand for fertilizer. The company currently reports earnings in three operating segments – Retail, Wholesale and Advanced Technologies.
Agrium has been strategically expanding, with its 1.236 billion AUD acquisition of AWB, a large Australian agribusiness specializing in grain, which is spread across Australia, India, Switzerland, Singapore, Japan and China with 500 points of presence and 2,200 employees. AWB is focused on rural and remote areas across Australia, with over 110,000 clients in two businesses – Commodity Management, which it sold off immediately to U.S. based Cargill, and Landmark Rural Services, which it kept. This acquisition gives Agrium a huge prospective customer base to integrate into its fertilizer and farm product services. Agrium management has also been closely following BHP Billiton’s attempted takeover of Potash Corp, the largest fertilizer company in the world. While Agrium is too small to make any bid for Potash, it has expressed interest in acquiring the Potash’s nitrogen and phosphates business, should BHP Billiton decide to auction of those assets, valued at $12 billion. Agrium has expressed strong confidence in its finances and has stated that it would bid on any available assets.
Even at these elevated levels, Agrium trades with a forward P/E of 13.44 and pays a 5.5 cent quarterly dividend. By P/E value, the stock is cheaper than its industry peers Monsanto (MON: Charts, News, Offers), Dow Chemical (DOW: Charts, News, Offers), Potash Corp and DuPont.The stock hasn’t slowed down despite missing analysts’ lofty estimates in November; in fact, JP Morgan (JPM: Charts, News, Offers)raised its 2011 estimates for Agrium on New Years’ Eve, citing higher crop prices, growing volume in retail and wider margins in wholesale as the key catalysts to the company’s growth. JP Morgan noted that Agrium could fall short of the most aggressive Street forecasts, but still pegged its price target at $95.
Other News About AGU
5-Star Stocks Poised to Pop: Agrium
Why there might be more growth in store for Agrium.
Cargill buys Agrium’s grain trade unit
Agrium spins off its newly acquired AWB grain unit.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
