Agrium (AGU) is a diversified producer and seller of the major fertilizer nutrients. Agrium alone among the major fertilizer producers has a large agricultural retail operation. The company’s large retail presence in North America has been expanded to Australia and to Europe. Agrium’s retail presence can provide stability and growth to its cash flows during periods of weaker fertilizer margins. The company is currently very profitable due to a strong agricultural backdrop and reasonable fundamentals in potash, phosphate, and nitrogen. Its near-term strategy is to build its retail operation by acquisition and to expand its potash production.
Agrium’s wholesale operations have been hit by several challenges these last several months, with the most recent the boiler failure at the Carseland facility that weighed on 1Q results. However, there is still optimism that the company will get through the recent production issues and see a strong lift from its Retail division over the full year.
The Consensus EPS estimate for Agrium in 2Q:14, previous to the release of 1Q:14 EPS, was $4.95/sh versus $4.94 in the year-ago period, or a flat to up result. Why the decrease? The Retail business is well-positioned for growth: the wholesale fertilizer business is in some disarray due to operational issues and lower product prices. Agrium is likely to absorb ($0.35) in costs in 2Q:14 from an outage at the Carseland nitrogen facility. There are an additional ($0.20/sh) in outage costs for 2Q:14 at the Joffre plant due to downtime at Nova Chemicals, and at the Redwater nitrogen facilities. The effects of these issues are compounded by a 24 day plant maintenance outage at Agrium’s Conda phosphate facility. The company attempted to use lower quality OCP...
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...l remain fairly low, which over the intermediate to long term should remain a key driver of the stock price, particularly when Wholesale's operational issues are in the rearview.
The weak 2Q/14 earnings guidance was a surprise, but the near-term challenges (nitrogen and potash downtime, lower nutrient price realizations) will likely persist through 2014. However, 2015 will bring significantly improved earnings and FCF as nitrogen and potash operations improve, and the Retail segment continues to grow through organic and inorganic avenues. The Wholesale segment will likely be impacted by: 1) nitrogen operational issues and related downtime; 2) Vanscoy expansion-related downtime; and 3) lower nutrient prices. While the Retail segment is expected to perform well, the Viterra integration will take some time and lower corn acreage presents some headwinds.