Agrium Inc. (TSX:AGU)(NYSE:AGU) may be in a boring business, but it’s one that should generate massive amounts of free cash flow in the near future for investors.
The company is North America’s largest retailer of farming inputs such as seeds, chemicals and fertilizers. Its wholesale business produces all three of the major crop nutrients, while its retail business sells crop inputs and services that farmers require. By selling across multiple products and services, Agrium diversifies its operations from a simple fertilizer business.
For 2016 Agrium expects to generate EBITDA of over $2 billion. Over the next five years the company expects to make over $7 billion in free cash flow. With a current market cap of less than $15 billion, that appears very attractive.
Here are some of the methods Agrium will use to drive such impressive profitability.
Low earnings volatility allows for more stable investments
Over the years, Agrium’s earnings have shown significantly less volatility than that of its less diversified peers such as Potash Corp./Saskatchewan Inc. and Intrepid Potash, Inc. While those companies are largely levered to a single fertilizer input, Agrium is much more balanced. The company has major revenues sources from nitrogen, potash, crop protection chemicals, seeds, phosphate, data services, and more.
With more earnings stability comes the ability to continually and consistently reinvest back into the business. As we’ll see, Agrium has plenty of options for that.
Acquisition opportunities galore
Agrium is the largest single participant in the U.S. retail market with a 17% market share. Its nearest competitor, Helena Chemical Company, only has 7% of the market. Outside the top players, there is significant room for consolidation.
The most ripe acquisition targets should be in the 30% of the market that is run by independent producers. These should come at an attractive price and would benefit the most from linking up with Agrium’s vast distribution and sourcing network. Another 25% of the market is run by co-ops. This results in over 50% of the market being highly attainable for a market leader like Agrium.
In the past five years Agrium has been able to acquire over 260 locations, adding roughly $1.6 billion in sales. With plenty of opportunities left, Agrium should be able to rely on this growth driver for years to come, possibly for decades.
Capital expenditure needs are falling rapidly
After peaking in 2014 at $2 billion, capital expenditures should be able to fall significantly in the coming years. From 2016 onward, Agrium should be able to spend under $1 billion annually while still funding growth initiatives.
With $1.3 billion in operating cash flow last year, this capex reduction would be significant. It would help fund the company’s 3.5% dividend and massive share buybacks. Since 2011 Agrium has repurchased over 11% of its shares, with plans in place to buy back an additional 5%.
Set up for the long term
Investors in Agrium should be excited for the massive free cash flow opportunities ahead. With a variety of options such as buybacks, acquisitions, and dividends, the company is making sure it is returning value to shareholders.
Agrium appears to be one of the few companies that can lower its share count, grow its business, and pay out a market-beating dividend all at the same time. That sounds like a business worth buying.
