Agrium’s Diversified Business Model Offers Protection

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Based in Calgary, Canada, Agrium Inc. (NYSE:AGU) is a global leader in farm retailing. The company produces and markets agriculture products both at the retail and wholesale level. Agrium’s risk/reward is improving as the company’s diversified model protects it from the broader agriculture headwinds in 2014. Agrium represents a very attractive long-term buy opportunity, as the company should benefit from increased volumes from the Vanscoyexpansion in 2015 (on track for late 2014 start-up) and better operating results in retail including Viterra.

Agrium’s stock is up 10 percent in the last 30 days and up 5 percent year-to-date. Agrium is up along with corn prices as both geopolitical and weather related events have increased perceived production and distribution risk in the grain market. Moreover, higher nitrogen prices reflecting good seasonal demand combined with moderation of North American natural gas have also helped sentiment on Agrium and other fertilizer producers.

The company reported adjusted 4Q13 EPS of $0.87, in-line with the consensus estimates of $0.86. The headline EPS was adjusted for the share based payment expenses, the Landmark goodwill impairment, the impact of the Viterra purchase gain, the legal costs related to the acquisition, and the impact of the loss generated by the Viterra assets during 4Q on the basis that $8M of Viterra’s operating loss was due to acquisition costs and none of the Viterra operations were incorporated into the original $0.80-$1.25 per share 4Q13 guidance range.

Agrium’s retail business continues to post strong performance, driven by healthy services results in Australia and higher-than-expected seed rebates. Going forward, crop nutrients margins could improve further in a modestly inflationary nutrients environment in 1H14. With the addition of Viterra in its retail business, the company is looking for stronger SG&A leverage in 2014 and is on track with its $1.3 billion EBITDA target in 2015. The legacy Viterra stores are expected to contribute about a third of this growth.

Compared to the QTD average of ~$4.8 per mmbtu, the company has locked in most of its 1H14 needs under $4 per mmbtu and has avoided much of the price hike. However, higher natural gas prices later this year could hurt it and other nitrogen producers’ margins. Agrium is moving ahead with its $720 million Borger plant expansion, which is expected to complete by 2H15, and the company’s Vanscoy potash mine expansion project is also near completion, with expected start-up by late 2014.

In a more surprising move, the company paused its stock buyback program, which expires in May with 1.7 million shares remaining. Construction costs at the Vanscoy expansion project, which is now running 25 percent higher than its original estimates, could be one of the reasons of this surprising move. Agrium may also be keeping some additional cash for retail bolt-on acquisitions.

Agrium’s wholesale segment, like other fertilizer companies, has faced significant challenges lately, particularly in the last couple of quarters. However, despite seasonal challenges, the retail segment has continued to perform well, offsetting some of the challenges in the wholesale segment. The retail segment will also see a change in management early next month, when Steve Dyer, the current CFO, takes over the role of SVP President of Retail from Richard Gearheard, who will be retiring by end of March. The transition should be instrumental towards further retail improvement across general operations, working capital efficiencies, and retail’s growth strategy going forward.

With the retail operations getting new management, further improvement is also expected in operating margins and cash flow generation, which should not onlyimprove company’s results but should also result in multiple expansion. We are also nearing the North American spring application when the market should see a seasonal rally and help the fertilizer companies post strong results. Finally, a high dividend yield of 3.1 percent should also keep investors interested in this Calgary-based company.

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