Agrium Forgetmenots vs Know Potential-8644 (Photo credit: TMYphoto)
AGU : NYSE : US$87.26
AGU : TSX
BUY
Target: US$106.00
COMPANY DESCRIPTION:
Agrium Inc. is a leading global producer and marketer of agricultural nutrients, industrial products, specialty fertilizers, and a major retail supplier of agricultural products and services in North America, South America and Australia.
All amounts in US$ unless otherwise noted.
Investment recommendation
We continue to prefer the non-potash equities over the potash equities due to an oversupply in the potash market and the added uncertainty that has now arisen as a result of the Uralkali announcement (which has been followed by a lowering of prices into a few markets, and more importantly, the expectation by buyers of a lowering of price into all markets). Monsanto (BUY, US$121.00) remains our top pick, followed by Agrium on a relative trade. We continue to prefer, on a relative basis, the shares of Monsanto here (as the outlook for its seed business in the Americas continues to look positive, providing continued earnings momentum), and Agrium on a relative basis (where its retail segment offers less volatility through a wide range of inputs from seeds to fertilizers to chemicals, as well as exposure to all three wholesale fertilizers) versus those of Mosaic and Potash Corp., where the majority of their business is exposed to potash sales. And given the multiple spread mentioned below, we believe that as the market fundamentals unfold, Agrium will continue to narrow the spread on the potash producers, something that has been occurring since Agrium announced Q1 results in early May.
Investment highlights
Agrium reported adjusted Q2/13 EPS of US$4.94 versus guidance of US$4.60-5.40, our estimate of US$4.92 and consensus of US$4.95.
On a P/E multiple basis, the potash equities have historically traded at a 2.5+ point multiple premium to Agrium. That spread widened through the winter, such that Potash Corp.’s multiple spread discrepancy versus Agrium ballooned to 5.7x through the end of April, but has since narrowed to 3.7x. We expect the relative trade to continue to narrow in Agrium’s favour over the next few quarters.
Valuation
We continue to rate the shares of Agrium a BUY with a 12-month target price of US$106.00 based upon a 10.75x multiple to our blended 2014E/2015E EPS
Related articles
- Agrium profit falls after unseasonably cool North American spring (business.financialpost.com)
