Why Agrium Inc. Investors Should Remain Cautious This Week

Agrium Inc. (TSX:AGU)(NYSE:AGU) may disappoint when it reports quarterly earnings this week, but here’s the key metric to watch for.

The Motley Fool

Investors in Agrium Inc. (TSX:AGU)(NYSE:AGU) should brace themselves for a volatile week as the agricultural company prepares to release its third-quarter earnings before the market opens on November 5.

Peer Potash Corporation of Saskatchewan Inc.’s (TSX:POT)(NYSE:POT) surprisingly weak Q3 numbers reported last week has made the market wary—Potash not only missed analysts’ estimates, but also lowered its full-year guidance, signaling greater pain ahead for fertilizer companies.

While Agrium has hugely outperformed Potash this year, it isn’t immune to the macro challenges that Potash outlined in its Q3 report. There are high chances of Agrium reporting weak numbers and downgrading its outlook this week. Here’s why.

Potash’s numbers indicate trouble for Agrium

During the second quarter, Agrium lowered its full-year guidance despite strong growth in its quarterly profit. It projected 2015 earnings per share to range between US$7 and US$7.50, down from its previous EPS guidance range of US$7-8.25. The company blamed weak potash and phosphate prices and the impact of lower crop prices on demand for its retail segment products for the weak outlook.

Unfortunately, Potash’s Q3 numbers confirm Agrium’s fears. Potash’s selling prices for its namesake nutrient were nearly 11% lower year over year. Worse yet, Potash realized 10% lower price for nitrogen, which is also Agrium’s primary nutrient.

Simply put, investors shouldn’t expect much from Agrium this week. As wholesale (which is primarily fertilizers) is also its most profitable segment, low nutrient prices will likely hit Agrium’s bottom line.

Why lower guidance isn’t unlikely

Things don’t look too good with Agrium’s retail side of business either. For instance, seed giant Monsanto reported 9% drop in its seeds and genomics sales for the last quarter, with corn seed sales continuing to fall. With Canada’s grain crop projected to breach its five-year average this year, Agrium’s retail gross profit could suffer.

Combined, the challenges could mean that Agrium’s Q3 earnings will fall short of consensus estimates of US$7 per share, even compelling the company to further reduce its full-year guidance.

The key point to note

Investors should look beyond the numbers and focus on how Agrium plans to deal with the difficult times. Any plans to restructure in the form of plant shutdowns or layoffs could indicate tougher times ahead. Potash, for instance, is cutting back production in the fourth quarter.

More importantly, keep an eye on Agrium’s cash flows. Higher dividends in recent times have been a major attraction for Agrium investors. But whether or not the company’s aggressive dividend policy (its quarterly dividend has grown 75% in two years) is sustainable will largely depend on how much cash it can generate even in challenging business conditions.

You must know that Agrium is currently free cash flow negative. So, any further dividend growth could spell danger until its cash flow improve. How Agrium plans to improve cash flow should be among the key things to watch for in its upcoming earnings report.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Neha Chamaria has no position in any stocks mentioned. Agrium Inc. is a recommendation of Stock Advisor Canada.

More on Investing

A cannabis plant grows.
Cannabis Stocks

Canopy Growth Stock Is Rising But I’m Worried About This One Thing

Canopy Growth stock is soaring as the legalization effort makes real progress in both Germany and the United States.

Read more »

young woman celebrating a victory while working with mobile phone in the office
Investing

3 Roaring Stocks to Hold for the Next 20 Years

These top TSX stocks are excellent long-term buys, given their multi-year growth potential and solid underlying businesses.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

grow dividends
Investing

Here’s My Top 3 TSX Stocks to Buy Right Now

Even though the TSX has been rising, there are still some good bargains out there. Here are three top compounding…

Read more »

Target. Stand out from the crowd
Investing

Prediction: This Canadian Growth Stock Could Double by 2030

Alimentation Couche-Tard (TSX:ATD) is a top growth stock that could do well over the next six or so years.

Read more »

Businessman holding AI cloud
Tech Stocks

Could Investing $20,000 in Nvidia Make You a Millionaire?

Nvidia stock has made investors millionaires in the last 10 years. Is it too late to invest to become a…

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

money cash dividends
Stocks for Beginners

Have $500? 3 Absurdly Cheap Stocks Long-Term Investors Should Buy Right Now

If you're looking for cheap stocks, these three have a huge future ahead of them, all while costing far less…

Read more »