Agrium Inc. NEUTRAL ZACKS CONSENSUS ESTIMATES (AGU-NYSE)

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1 February 26, 2015 Agrium Inc. (AGU-NYSE) NEUTRAL Current Recommendation Prior Recommendation Underperform Date of Last Change 11/13/2013 Current Price (02/25/15) $ Target Price $ SUMMARY We are reaffirming our Neutral recommendation on Agrium. Its revenues and profit slipped year over year in the fourth quarter of Sales fell due to a double-digit decline in the wholesale business, hurt by facility outages. Both revenues and adjusted earnings missed expectations. The company, however, provided healthy earnings guidance for 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 crop pricing environment is expected to remain soft in the near term. Moreover, demand environment for potash is still somewhat uncertain in India, a key market. The company is also faced with issues such as logistical constraints. SUMMARY DATA 52-Week High $ Week Low $82.79 One-Year Return (%) Beta 1.57 Average Daily Volume (sh) 539,773 Shares Outstanding (mil) 144 Market Capitalization ($mil) $16,685 Short Interest Ratio (days) 5.55 Institutional Ownership (%) 65 Insider Ownership (%) N/A Annual Cash Dividend $3.12 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 14.4 Earnings Per Share (%) 16.3 Dividend (%) using TTM EPS 19.6 using 2015 Estimate 15.4 using 2016 Estimate 12.9 Zacks Rank *: Short Term 1 3 months outlook 2 - Buy * Definition / Disclosure on last page Risk Level * 2015 Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL Below Avg., Type of Stock Large-Blend Industry Fertilizers Zacks Industry Rank * 23 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) ,224 A 7,016 A 2,869 A 2,867 A 15,727 A ,079 A 7,338 A 2,920 A 2,705 A 16,042 A ,267 E 7,647 E 3,130 E 3,141 E 17,185 E ,838 E *Note: Revenues in 2013 do not add up to the annual figure due to adjustments related to divestitures. Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.94 A $5.09 A $0.61 A $0.72 A $7.36 A $0.08 A $4.45 A $0.43 A $0.61 A $5.92 A 2015 $0.39 E $5.05 E $1.00 E $1.07 E $7.51 E 2016 $8.97 E *Note: Quarterly EPS may not add up to the annual figure due to one-time adjustments. Projected EPS Growth - Next 5 Years % 9

2 OVERVIEW Agrium Inc. (AGU), based in Alberta, Canada, is a major retailer of agricultural products and services in North and South America. The company is 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 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 86% of the Wholesale business is targeted at the agricultural market using crop nutrients to help enhance yields, while the remaining 14% 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. 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. 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 The turf and ornamental business was 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. REASONS TO BUY Despite a few near-term challenges, Agrium is poised to benefit from overall healthy trends for the agriculture and crop input market in the long haul. Agrium s crop protection markets remain competitive, but margins have stabilized recently. Demand for key crops is expected to rise in sync with increasing global population, thereby supporting crop input applications by growers. Demand for seeds is expected to be boosted by increased corn acreage in the U.S. Roughly 90 million acres of corn are expected to be planted in 2015, thereby driving the demand for crop nutrients. Agrium follows a focused strategy to grow along the value chain through a combination of acquisitions and organic development. The company, in May 2011, acquired Cerealtoscana S.p.A. ( CT ) and its subsidiary Agroport for $27 million plus working capital. Moreover, the company has acquired a 50% interest in a seed production and conditioning and distribution business called Cache River Valley Seed and also bought a controlling stake in agriculture biotechnology company Agricen. Moreover, the company agreed to purchase an equity interest in agricultural technology company CH Biotech, which is expected to boost biotechnology R&D initiatives for next-generation plant health technologies. Agrium, in December 2011, approved a one million ton brownfield potash capacity expansion at its Vanscoy potash facility in Saskatchewan, Canada. The expansion is expected to increase annual production capacity by roughly 50%, bringing the total annual nameplate capacity to Equity Research AGU Page 2

3 three million tons. Agrium, in December 2014, resumed production of potash at the Vanscoy mine after completion of the tie-in of its one million ton expansion project. Production at this site is expected to ramp up during the first half of 2015 with a production volume targeted at 2.1 million tons for this year. In the Wholesale business, Agrium expects India to be a significant growth driver as there has been a strong demand for urea in the country. China and Brazil also accounts for a large part of this demand. Moreover, nitrogen producers in North America should benefit from relatively lower natural gas prices, in part, driven by shale gas production. Agrium is committed to deliver value-added growth while maintaining shareholders value. The company has hiked in its quarterly dividend by 4% to $0.78 per share from the prior payout of $0.75. On annualized basis, this represents a payout of $3.12 per share. The dividend increase is part of Agrium's annual strategic review process and a step toward acknowledging the company s strength in its long-term agriculture fundamentals and the benefits of its integrated model. The dividend hike testifies Agrium's ability to generate significant cash flow from its business and also proclaims the strength that it holds across the crop-input value chain. Agrium also continues share repurchases. The company aims to return 40%-50% (up from 25%-35% targeted earlier) of its free cash flow to shareholders. It generated around $750 million of free cash flow in REASONS TO SELL Potash demand is expected to remain somewhat depressed in India. Depressed subsidy levels are expected to continue to affect demand in the country. While phosphate import is expected to improve in India (a major phosphate import market), uncertainty remains on timing and scale of import. Phosphate pricing also remains a concern. Moreover, nitrogen prices may be under pressure given the uncertainty surrounding Chinese export supplies. Agrium is also facing challenges stemming from weak crop pricing environment, which may continue to unfavorably impact the crop input market in the near term. Agrium also faces challenges in form of transportation bottlenecks and plant outages. Harsh winter weather challenged rail and port transportation logistics in 2014 and the constrained logistic capacity is expected to contribute to tight supply and demand balances within regional markets through the spring season. Moreover, the unplanned outage at the Carseland plant cut nitrogen volumes in second-quarter 2014 and hurt profits for the business. Outage at the Vanscoy potash mine due to a mechanical failure had a negative impact on potash gross profit in the most recent quarter. The Vanscoy facility had been out of operation for the most part of fourth-quarter 2014, thereby impacting production volume and potash gross profit. Turnaround at the company s Redwater nitrogen facility also impacted results in the wholesale unit. Agrium and other fertilizers and agricultural chemicals makers face significant challenges following the exit of world's largest potash maker Uralkali Group from one of the biggest potash cartels the Belarus Potash Company (BPC). Uralkali s Board decided to end export sales through BPC and direct all potash export through its Switzerland-based trade arm Uralkali Trading. BPC is one of the two largest cartels (along with North America s Canpotex) that influence potash pricing by controlling the production and supply. Uralkali s game-changing move has put pressure on potash prices. The dissolution has created an uncertain environment. Equity Research AGU Page 3

4 The global macroeconomic situation presents some risks that have the potential to impact agricultural markets. Agrium is also susceptible to natural gas price volatility. Natural gas is the key raw material used to make nitrogen and represents the largest purchased raw material in the company s Wholesale segment. Higher natural gas prices may impact nitrogen margins in the segment. RECENT NEWS Agrium's Q4 Earnings & Revenues Miss Estimates February 23, 2015 Agrium s earnings from continuing operations for fourth-quarter 2014 plunged 36.4% year over year to $70 million or $0.46 per share from $110 million or $0.74 per share a year ago. Excluding one-time items other than stock-based payment costs, earnings of $0.61 per share in the fourth quarter missed the Zacks Consensus Estimate of $0.64. Adjusted earnings exclude net loss on foreign exchange and derivatives, and one-time non-recurring tax gain. Agrium recorded revenues of $2,705 million in the reported quarter, down roughly 5.7% year over year. Sales declined due to a 12.9% drop in Wholesale sales as a result of lower potash and nitrogen volumes, stemming from the outage in Agrium s Vanscoy potash facility and Redwater nitrogen facility. This decrease was partly offset by higher realized selling price for phosphate. Sales missed the Zacks Consensus Estimate of $3,006 million. For 2014, net earnings from continuing operations were $798 million or $5.51 per share, down from $1.08 billion or $7.31 per share in For 2014, net earnings were $720 million or $4.97 per share, compared with $1.06 billion or $7.20 per share in Adjusted earnings of $5.92 per share beat the Zacks Consensus Estimate of $5.38. Revenues for full-year 2014 were registered at $16,042 million, up 2% from Sales for the year also missed the Zacks Consensus Estimate of $16,418 million. Segment Review For the fourth quarter, revenues from the Retail segment were in line with the year-ago comparable quarter, at $2.1 billion. Gross profit rose 5% year over year to a record $614 million. The record results were driven by international operations. Within the Retail business, crop nutrient sales declined 7.6% year over year to $972 million in the quarter due to a 14% decrease in volumes of nutrients in the U.S. The Retail segment s EBITDA (excluding the net effect of one-time acquisition and asset valuation adjustments for Viterra and Retail-Australia made in the fourth quarter of 2013) increased 9% year over year to $181 million. Sales from the Wholesale segment were $897 million, down 12.9% year over year. Gross profit was $130 million in the quarter, down 24.4% from $172 million in the year-ago quarter. Wholesale adjusted EBITDA declined 36.7% year over year to $150 million, owing to planned downtime at the Vanscoy potash facility and lower volumes of ammonia. This decline was partly offset by better phosphate results. Equity Research AGU Page 4

5 Nitrogen sales volumes declined 3% year over year to 879,000 tons due to lower ammonia sales volumes, which were negatively impacted by adverse weather in the U.S. and downtime at the Redwater nitrogen facility. Potash sales volumes plummeted to 19,000 tons in the reported quarter from 344,000 tons in the prior-year quarter, owing to lower volumes that resulted from downtime at the Vanscoy mine. Phosphate sales volumes increased 7% to 305,000 tons in the quarter owing to strong operating rates and good regional demand. Dividend On Feb 24, 2015, Agrium s board announced a dividend of $0.78 per common share to be paid on Apr 6, 2015, to shareholders of record as of Mar 31, Financial Position Agrium s cash and cash equivalents stood at $848 million as of Dec 31, 2014, up 5.9% year over year. Long-term debt increased 16% year over year to $3,559 million as of Dec 31, Outlook Agrium expects earnings per share for 2015 to be in the range of $7.00 $8.50. Cash margins, which can support crop input demand, are also anticipated to grow in The company expects that framers will opt for genetic seed offerings and use crop nutrients and crop protection products to maintain crop yield. However, under present North American acreage projections, nutrient demand in North America is forecasted to be slightly lower in Agrium expects Retail sales volumes to be in the range of million tons in EBITDA for retails is expected in the range of $1.15 $1.25-billion. Nitrogen production, based on utilization rate for the company s nitrogen assets, is anticipated to be in the range of million tons in The guidance for earnings per share assumes that NYMEX gas prices will be between $2.50 and $4.00 per MMBtu this year. Agrium expects potash production to be in the range of million tons in Agrium anticipates total capital expenditures for 2015 to be in the range of $1.2 $1.3 billion, of which about $500 $550 million is expected to be incurred as sustaining capital expenditures. This forecast is a reduction from $2 billion of total capital expenditures in 2014, as Agrium wraps up its Wholesale capacity expansion projects this year. Agrium Misses Earnings Estimates in Q3, Hikes Dividend November 3, 2014 Agrium posted profit from continuing operations of $91 million or $0.63 per share in the third quarter of 2014, a rise of around 13.8% from $80 million or $0.54 per share registered a year ago. Agrium recorded a one-time tax benefit of $29 million ($0.20 per share) in the quarter. Barring that impact (and treating stock-based payments as a normal item), earnings from continuing operations came in at $0.43 per share, missing the Zacks Consensus Estimate of $0.50. Revenues went up roughly 4.4% year over year to $2,920 million in the reported quarter. Sales missed the Zacks Consensus Estimate of $3,034 million. The company posted improved results amid a challenging agriculture market. The performance of its Wholesale unit in the quarter was driven by strength across phosphate and nitrogen businesses. Equity Research AGU Page 5

6 Segment Review Revenues from the Retail segment moved up 9% year over year to $2.3 billion in the reported quarter. Gross profit rose 6.1% year over year to $542 million. The record results were driven by contributions from the acquired Viterra agri-retail operations. Within the retail business, crop nutrient sales declined 1.2% to $646 million in the quarter on lower global nutrient prices and U.S. volumes, which were down 4% compared with the year-ago quarter mainly due to late harvest. Retail segment s EBITDA fell 11.6% year over year to $130 million due to lower demand for crop protection products owing to near perfect growing conditions across the U.S. limiting crop disease and insect pressure as well as reduced planted corn acreage and prices. Sales from the Wholesale segment were $803 million, up 2.2% year over year. Gross profit was $127 million in the quarter, up from $124 million a year ago. Wholesale adjusted EBITDA rose 18.8% on the back of higher phosphate earnings, which offset the impact of the main host mechanical failure and planned tie-in of the one million ton expansion project at the Vanscoy potash plant. Nitrogen sales volume jumped 15.6% year over year to 735,000 tons in the quarter due to higher urea sales volumes. Potash sales volume moved down 5.3% to 251,000 tons, as lower volumes of domestic product were available for sale. Phosphate sales volumes increased 36% to 261,000 tons in the quarter as capacity utilization improved at the Redwater facility. Discontinued Operations Agrium completed the sale of the Turf and Ornamental portion of the assets held for sale in Jul 2014 for roughly $94 million. Financial Position Agrium exited the quarter with cash and cash equivalent of $274 million, a 7.5% year-over-year rise. Long-term debt increased 1.8% year over year to $3,069 million. Dividend Agrium announced its plans to its hike its dividend by 4% or $0.12 per share to $3.12 per share on an annualized basis. The increased dividend is expected to be paid in quarterly installments of $0.78 per share and the next installment will be paid on Jan 21, 2015, to shareholders of record as of Dec 31, Outlook Agrium expects earnings per share from continuing operations for the fourth quarter of 2014 to be in the range of $0.45 to $0.75 per share. The guidance excludes net gains or losses on foreign exchange and derivative positions and share-based payments expenses or recoveries. Equity Research AGU Page 6

7 VALUATION Currently, Agrium shares are trading at 15.4x our 2015 EPS estimate of $7.51. The company s trailing 12-month earnings multiple is 19.6x, compared with the 55.9x average for the peer group and 18.5x for the S&P 500. Over the last five years, the company s shares have traded in the range of 6.9x to 21.9x trailing 12-month earnings. Our long-term Neutral recommendation on the stock indicates that it should perform in line with the broader market. Our price target of $122 is based on 16.2x our 2015 earnings estimate. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Agrium Inc. (AGU) Industry Average S&P Legend International Holdings, Inc. (LGDI) China Agri-Business Inc. (CHBU) Yara International ASA (YARIY) Mosaic Co. (MOS) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Agrium Inc. (AGU) Industry Average S&P Equity Research AGU Page 7

8 Earnings Surprise and Estimate Revision History Equity Research AGU Page 8

9 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of AGU. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1126 companies covered: Outperform %, Neutral %, Underperform 8.1%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Equity Research AGU Page 9