Agrium (AGU) recently reported disappointing first quarter results with its EPS and revenues missing analyst expectations. The main reason for this miss was a late start of spring season in the US this year. Things are expected to improve going forward and the second quarter is off to a good start. The company’s retail-distribution business has seen a very strong pickup in field work and grower demand across the U.S. and Canada over the past month. In fact, the company has seen retail distribution revenues in April come in well above the same period last year.
According to Agrium CEO Chuck Magro,
"Agrium's first quarter results were impacted by a late start to the spring season in the U.S. this year. All indications are that Agrium will deliver strong second quarter results on solid crop input demand now that the spring application season is fully underway and given we have made excellent progress ramping up production from our expanded potash facility over the past month. We continue to position our operations and asset mix to support higher cash flow and capital returns over time irrespective of any short term headwinds. The increase in the dividend and recent share buy-back activity demonstrates our commitment to this strategy and to our shareholders."
I believe investor should look beyond this short term miss and buy Agrium stock. There were a lot of positives in the company’s earnings release. The company announced a 12 percent increase to dividend, now $3.50 per share on an annualized basis. It has also repurchased $75-million or approximately 712,000 shares since the beginning of April. The stock reacted positively even after the earnings miss as management talked about positive trends Agrium is witnessing from April.
Agrium is a retailer of agricultural products and services in the United States, Canada, Australia, Argentina, Brazil, Chile and Uruguay, as well as a multi-national producer and wholesale marketer of nutrients for agricultural and industrial markets. Agrium’s strategy is to invest and operate across the agricultural inputs value chain (fertilizer, crop protection and seed), through production, distribution and retail sales. This integrated strategy allows the company to generate both strategic and operational synergies. For the fiscal year ended December 31, 2014, Agrium reported its business through two business units and a non-operating segment for Corporate and inter-business unit eliminations. The two business units are Retail and Wholesale.
Retail: Agrium’s Retail business unit markets crop nutrients, crop protection products, seed, merchandise, application and other agronomic services through approximately 1,375 retail locations in the United States, Canada, Australia, Argentina, Brazil, Chile and Uruguay. Major offerings of this segment includes crop nutrients (40%), crop protection (36%), seed sales (11%), merchandise (7%) and services (6%).
Wholesale: Agrium’s Wholesale business unit manufactures, mines and markets a full range of nutrients including nitrogen-based, potash and phosphate-based crop nutrient products. Wholesale owns and operates five major North American nitrogen facilities, four located in Alberta, Canada and one in Borger, Texas, United States. The majority of the nitrogen produced in Alberta is sold in Western Canada and the Northwestern and Northern Plains regions of the United States. Nitrogen products from Borger are sold in the Texas Panhandle area and ammonia is sold by pipeline to the U.S. Corn Belt.
In February, Agrium raised its target dividend pay out ratio to 40%-50% of free cash flow and the recent dividend hike is a step towards achieving that objective. The company also plans to buy back up to 5% of its common shares over the next 12 months. According to the company’s CEO, Chuck Magro, the company expects its free cash flow generation to increase significantly as it complete its major production capacity expansion projects for nitrogen and potash this year. According to him, the higher payout ratio strikes a balance between returning significant capital to shareholders, while maintaining Agrium’s core assets and flexibility for growth.
Agrium is trading at 13.89 times FY2015 EPS estimates and has a dividend yield of 2.80%. The company's EPS forecast for FY2014 is $7.74 and FY2015 is $8.92. According to the consensus estimates, its top line is expected to grow 4.60% in FY2015 and 4.70% in FY2016. Out of 29 analysts covering the company, 13 are positive and have buy recommendations, 15 have hold ratings and one has a sell rating. Recently, RBC Capital analyst Chris Nocella reiterated a Buy rating on the company with a target price of $130.
GuruFocus' DCF calculator gives the company a $156 target price and a four star business predictability rating. At current price, the stock offers a margin of safety of 32%.
Over the last 10 years, the company's revenues have grown at a CAGR of 18.20% while its EPS has grown at a CAGR of 21.60%. I believe the stock is a good buy at current levels given its good historical growth rates, improving business fundamentals and cash-flow generation, reasonable valuations and a good dividend yield.
