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Agrium Inc. (AGU): New Analyst Report from Zacks Equity Research - Zacks Equity Research Report

Posted: 2/24/2014 7:00:00 AM
Referenced Stocks: CPS;UAN;AAT;CF;AGU

We are retaining our Neutral recommendation on Agrium. Its revenues and profit rose year over year in the third quarter. Sales were driven by gains across the retail and wholesale businesses. But both revenues and adjusted earnings missed expectations. Despite certain near-term headwinds, Agrium stands to benefit from overall healthy fundamentals for the agriculture and crop input market in the long term. It should also gain from its capacity expansion projects. We are also encouraged by the company's commitments to boost shareholder returns. However, the pricing environment is expected to remain soft in the wholesale business. Moreover, demand for potash and phosphate is expected to be somewhat weak in India, a key market. The company is also faced with issues such as logistical constraints and plant outages.


Agrium Inc., based in Alberta, Canada, is a major retailer of agricultural products and services in North and South America. Agrium is the third largest potash producer in North America. The company is also a leading global wholesale producer and marketer of all three major agricultural macronutrients - nitrogen, potash, and phosphate - besides being a premier supplier of micronutrients and specialty fertilizers in the U.S. and Canada. Agrium operates through two segments Retail and Wholesale.

The Retail segment offers Crop Nutrients, Crop Protection Products, Seed, Merchandise and Application & Other Services directly to farmers. Crop Nutrients include a complete range of products such as nitrogen, phosphate, potash, sulfur and micronutrients in either liquid or dry form. Crop Protection Products consist of herbicides, insecticides and fungicides. Seeds contain a complete range of crop seeds as well as liquid and dry fertilizers.

The Retail segment operates 444 farm centers and 49 distribution/warehouse facilities across 30 states in the U.S., Argentina and Chile. It has three business trademarks:

Crop Production Services (CPS) serves the Corn Belt and Eastern agricultural regions of the U.S. growing key crops such as corn, soybeans, wheat and cotton.

Western Farm Services (WFS) serves the Western U.S. including California, Arizona, Washington, Oregon and Idaho, growing crops including fruit, vegetables and wheat.

Agroservicios Pampeanos S.A. (ASP) in South America a wholly owned subsidiary serves the wheat, soybeans and corn growing region of Argentina and the fruit growing region of Chile.

The Wholesale segment provides nitrogen phosphate and potash based fertilizers and products purchased from domestic and international suppliers for resale in the U.S. and Canadian markets. About 85% of the Wholesale business is targeted at the agricultural market using crop nutrients to help enhance yields, while the remaining 15% is used for a broad range of industrial purposes, which include ammonia in dry and liquid form, urea and urea ammonium nitrate (UAN). Urea is the largest of Agrium's Wholesale products. The company has 6 nitrogen facilities, 4 in Alberta and 1 each in Argentina and Texas 1 potash mine at Vanscoy, Saskatchewan and 2 phosphate products facilities in Conda, Idaho and Redwater, Alberta.

Agrium conducted a strategic review of the Advanced Technologies (AAT) segment in 2013 to transition the Agriculture business (which includes environmentally smart nitrogen/ESN and Micronutrient products) of AAT to its Wholesale unit. The integration of the ESN business into wholesale is expected to offer cost savings of $10 million to $15 million in 2014.

Other Business Unit is Agrium's non-operating reporting line where the elimination of inter-segment transactions and corporate expenses are recorded. Inter-segment transactions are primarily related to sales of crop nutrients to the Retail unit from Wholesale unit.

Acquisitions and Divestitures

On December 3, 2010, Agrium acquired 100% of AWB, an agribusiness operating in Australia, for $1.2 billion in cash and $37 million of acquisition costs. On May 11, 2011, the company completed the sale of the majority of the Commodity Management businesses acquired from AWB, in accordance with an agreement dated December 15, 2010. Cash received from the sale was $694 million.

Agrium retained its Landmark retail operations, including over 200 company-owned retail locations and over 140 retail franchise and wholesale customer locations in Australia. The primary purpose of the acquisition was to expand the retail division and provide access to the growing Southeast Asia market. The acquired business is included in the Retail operating segment.

Agrium, in March 2012, entered into an agreement with Viterra Inc. to acquire the majority of its Agri-products business. The acquisition was completed in October 2013. Agrium acquired more than 200 retail stores across Canada and Australia. The acquisition of Viterra's assets is an excellent fit to Agrium s portfolio as it will be able to provide highly competitive products, services and technologies by combining its experience with Viterra's profound knowledge of western Canadian agriculture.

On August 2, 2012, Agrium and Glencore announced that CF Industries Holdings Inc. (CF), which owns a 66% interest in the Medicine Hat nitrogen facility, will buy Viterra's (now acquired by Glencore) 34% interest in the facility for C$915 million. CF Industries completed the acquisition during second-quarter 2013. Pursuant to the transaction closure, Agrium received $932 million which is subject to adjustment according to its agreement with Glencore.

Agrium, in March 2014, agreed to sell selected Canadian retail assets (16 retail agronomy locations in the provinces of Alberta and Saskatchewan) to the U.S. farmer-owned cooperative and a global energy, grains and foods company CHS Inc. for an undisclosed price. The 16 retail agronomy assets are part of Agrium's acquisition of Viterra's retail stores across Western Canada.

Agrium, on May 9, 2014, inked a deal with Koch Agronomic Services, LLC, an affiliate of Koch Fertilizer, LLC, to divest its turf and ornamental business. The roughly $94 million transaction was completed in July 2014. The turf and ornamental business is a part of Agrium's former AAT group. The divestment is part of a strategic review of the business completed last year with regards to the discontinued operations of the AAT unit.

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