Agrium: Risk-Reward Balanced - Analyst Blog

On May 23, we issued an updated research report on Agrium Inc. AGU. While the fertilizer maker is poised to benefit from strength in the agriculture and crop input market, it is exposed to a soft wholesale pricing environment and certain near-term challenges.

Agrium's profit dropped year over year in the first quarter of 2014, reported on May 6, due to bad weather and lower nutrient pricing. Revenues fell as gains in the core retail business were more than offset by a double-digit decline in the wholesale franchise.

Agrium, a Zacks Rank #3 (Hold) stock, follows a strategy to grow along the value chain through a combination of acquisitions and organic development. The acquisition of Viterra Inc's agri-products business is an excellent fit to Agrium's portfolio, allowing it to offer highly competitive products, services and technologies by combining its experience with Viterra's profound knowledge of western Canadian agriculture.

Agrium stands to gain from overall strong fundamentals for the agriculture and crop input market. The company is expected to see strong demand for crop protection products in 2014. Favorable crop prices have triggered a rebound in farmer sentiment in this year's spring application season, supporting demand for crop nutrients.

However, the pricing environment is expected to remain soft in the wholesale business. Nitrogen prices may remain under pressure due to Chinese export supplies. While phosphate import is expected to improve in India (a major import market) in 2014 compared with 2013, uncertainty remains on timing and scale of import.

Agrium also faces challenges in form of transportation bottlenecks and plant outages. Harsh winter weather has challenged rail and port transportation logistics so far this year and 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 company's Carseland plant will cut nitrogen volumes and is expected to affect earnings in second-quarter 2014.

Other Stocks to Consider

Other companies in the basic materials sector worth considering are Yara International ASA (YARIY), Compass Minerals International Inc. CMP and PetroLogistics LP PDH. While both Yara International and Compass Minerals hold a Zacks Rank #1 (Strong Buy), PetroLogistics retains a Zacks Rank #2 (Buy).

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