Agrium Reports Disappointing Quarterly Results (AGU)

Agrium AGU disappointed with a 3Q earnings miss, even after adjusting for natural gas hedges and stock-based compensation. A variety of factors hit earnings, including an 64-day extended shutdown in the South American nitrogen business, realized prices in the nitrogen business that were softer than anticipated, and a sequential deceleration in top-line growth in the retail business. Even as the potash market gradually recovered earlier this year, AGU's wholesale potash business was selling volumes close to the maximum production run-rate based on its ~2mmt mine capacity. As the market strengthens, AGU should benefit from higher realized prices in 4Q'10 and especially in 2011, Retail gross margins of 25.6% in 3Q'10 improved significantly sequentially despite some lingering pressure in the crop protection segment. AGU is steadfast in its strategy of rolling up retail businesses and increasing margins through cost savings and introducing private label products. Citi thinks the retail business will benefit from higher volumes, but the business does not have the earnings leverage of a pure-play fertilizer producer. Citi has a Hold rating and an $89 PT on AGU AGU closed Wednesday at $84.92