A Fertilizer Play That Is Dirt Cheap

Agrium has opportunity to grow as fertilizer demand rebounds.

THE PROMISE OF SPRING IS EVERYWHERE -- except in Agrium shares. Like other fertilizer companies, Calgary, Alberta-based Agrium rode the boom in crop prices to unprecedented heights, only to plummet last year when commodities, agricultural and otherwise, went bust. In less than a year, most fertilizer stocks lost more than 60% of their value, which for Agrium meant a nose dive to $22 from $113. The stock (ticker: AGU) now changes hands at 41.

Look closer, however, and it is apparent Agrium's spring awakening is merely delayed. Demand for fertilizer, which tends to track corn prices, is likely to rebound as the global economy improves. In the meantime, the company is expanding its network of more than 870 retail farm centers in North and South America, in order to help reduce its dependence on commodity prices. A pitched battle for fertilizer rival CF Industries (CF) may be distracting investors from Agrium's sunnier prospects, but a victory surely would make Wall Street take notice.

One thing is clear: Based on multiple metrics, Agrium is dirt cheap. The stock trades for just 6.8 times this year's expected earnings of $6.11 a share and 5.8 times Wall Street's 2010 forecast of $7.14, well below other fertilizer stocks -- and the company's historic multiple of 14 times future profits. The shares fetch one to 1.5 times book value, less than half their five-year average.

Look closer, however, and it is apparent Agrium's spring awakening is merely delayed. Demand for fertilizer, which tends to track corn prices, is likely to rebound as the global economy improves. In the meantime, the company is expanding its network of more than 870 retail farm centers in North and South America, in order to help reduce its dependence on commodity prices. A pitched battle for fertilizer rival CF Industries (CF) may be distracting investors from Agrium's sunnier prospects, but a victory surely would make Wall Street take notice.

One thing is clear: Based on multiple metrics, Agrium is dirt cheap. The stock trades for just 6.8 times this year's expected earnings of $6.11 a share and 5.8 times Wall Street's 2010 forecast of $7.14, well below other fertilizer stocks -- and the company's historic multiple of 14 times future profits. The shares fetch one to 1.5 times book value, less than half their five-year average.

Richard A. Kelertas, an analyst at Dundee Capital Markets, cited such discounts when he initiated coverage of Agrium in January with a Buy rating. He later raised his 12-month price target for the Toronto-listed shares (AGU.Canada) to 61 Canadian dollars, some 21% above their recent C$50.47. (One Canadian dollar is about 82 U.S. cents.)

"The world has been on a wild ride, but agriculture probably has been the least wild of the bunch," says 57-year-old Chief Executive Mike Wilson, a chemical engineer who has run Agrium since 2000. Global grain demand has increased steadily in the past 20 years, with consumption rising by about 40 million metric tons a year, he notes. Given a growing taste for grain-fed livestock among the emerging middle classes in countries such as China and India, the trend is apt to continue, Wilson adds.

Tracing its roots to 1931, Agrium is the third-largest potash producer in North America. Agrium also makes and markets nitrogen- and phosphate-based plant nutrients, and is the leading agricultural-products retailer in the U.S. Its farm centers sell, among other products, seeds, insecticides -- and fertilizer. The company isn't "just a bet on fertilizer volume and prices," says Lawrence Franko, a senior equity analyst at Delaware Investments in Philadelphia. "It is kind of a back-door way to piggyback on Monsanto 's [MON] success without paying a high valuation."

Monsanto, a leader in genetically modified seeds, trades for about 20 times forward earnings.

With its purchase last May of distributor UAP, Agrium now owns 15% of the U.S. farm-retail market. Yet the company's retail operations represent just a quarter of last year's record $2.3 billion in earnings before interest, taxes, depreciation and amortization. Agrium aims to have retail plus its tiny advanced-technology business chip in half of Ebitda in the future, and perhaps as much as 70% when fertilizer is in a slump.