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Will Agrium Inc. Hit $125?

Shareholders of Agrium Inc. (TSX: AGU)(NYSE: AGU) are watching the stock trade at 2014 lows and wondering if they should buy more shares, sell the stock before it drops further, or simply hold on.

The stock has been under pressure lately because Agrium announced it would miss Q3 and Q4 earnings guidance due to the shutdown of its Vanscoy potash plant. An earnings miss is never good news, but in the case of Agrium, investors should take a close look at the details.

Here are the reasons why I think Agrium’s earnings could rebound significantly in the next 12 months.

Production growth

Agrium is near the end of a $2 billion expansion at the Vanscoy mine. Once the final tie-in is complete, the mine’s production capacity will increase by 40%.

A mechanical failure on the main hoist system occurred in July, forcing the company to fast-track the planned tie-in of the expansion project. The original shutdown was expected to take three to four months, but the equipment problem has extended the closure.

In the summer, Agrium indicated the plant would be back online by the end of November. Investors should prepare for that deadline to be extended when the company reports third-quarter earnings in the first week of November. Even if Vanscoy remains down for an extra month or two, the long-term benefit of the expansion is the most important aspect for investors.

The 40% additional production is coming on line just as the Potash market is rebounding. Uralkali, the world’s largest potash producer, said global potash demand could hit record levels by the end of 2014.

Wholesale prices are expected to rise as much as 10% in 2015.

On September 23, Uralkali announced a deal to sell a 12.5% stake of the company to China’s sovereign wealth fund, China Investment Corp. Analysts believe the stake is too small for the Chinese to dictate global prices.

Nitrogen market

Agrium’s nitrogen division is the largest part of its wholesale business. The company had an unplanned shutdown at its Caresland, Alberta, plant earlier this year. Lower production coupled with high natural gas input costs hurt nitrogen profits during the first six months of 2014.

Nitrogen prices are stabilizing, natural gas prices are lower than the first half of this year, and production through 2015 should be back at regular levels.

Retail strength

Agrium is North America’s largest retailer of farm products. The company also has an extensive network of stores in Australia and South America. In 2013, Agrium purchased the retail operations of Viterra. The company expects the largest synergy gains from the deal to come in 2015.

In the second quarter, Agrium’s retail division enjoyed a 28% year-over-year earnings gain. Record crops in the U.S. this year should be good new for the retail division going into 2015.

Dividend growth

Agrium pays a dividend of US$3 per share that yields about 3.6%. Cash flow available for payouts should increase as Vanscoy shifts from development to production. The payout ratio is currently 54%.

Short-term risks

A much longer delay in the start-up of Vanscoy could put extra pressure on the stock. Another tough winter in the prairies could also cause shipping issues similar to the ones experienced last winter when a railway bottleneck reduced the amount of product Agrium was able to transport from its facilities.

Should you buy?

If Vanscoy restarts on time, and revised earnings come in as expected, the stock could see a significant move heading into 2015. Otherwise, the shares will likely trend lower.

Agrium is trading at 11 times forward earnings and 1.7 times book. For long-term investors, the stock is probably a good buy at current levels, but it might be best to wait for the third-quarter earnings report.

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

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