ValueAct Capital is an activist hedge fund that invests through concentrated positions in undervalued stocks. With high ownership levels, the company leverages its voting power to constructively work with management to boost shareholder returns.
According to SEC filings, the fund recently bumped up its position in Agrium Inc. (TSX:AGU)(NYSE:AGU) from roughly eight million shares to nearly 10 million, representing about 7% of Agrium’s total shares. With ValueAct set to begin unlocking shareholder value (or so they hope), should you follow suit and purchase Agrium stock?
Diversified profit streams
Many of Agrium’s competitors are reliant on a single product source that constitutes a majority of sales. For example, a large majority of both Potash Corp./Saskatchewan Inc. and Mosaic Co.’s sales come from potash alone. Agrium, meanwhile, is much more diversified with no single product constituting a majority of sales.
For 2015 earnings are projected to be split fairly evenly between nitrogen, potash, crop protection chemicals, and other nutrients. The company also has exposure to seeds, phosphates, and other services. Agrium’s diversified portfolio makes it the largest global retail distributor of crop inputs in an industry where scale matters.
An extensive distribution network
Agrium has over 1,500 retail and wholesale locations spread across both Canada and the United States. The company also has a sprawling network through some of South America and most of Australia. These locations are able to offer crop inputs and services for over 50 different crops.
This network is a unique advantage as fertilizer production peers such as Potash Corp. and Mosaic lack an existing retail distribution network. Whereas Agrium management has observed peers spending a significant amount of capital to build new distribution centres, Agrium can rely on its industry-dominating connection of existing infrastructure to serve customers faster and more fully.
Room to grow
In the U.S. retail market, Agrium has a leading market share of 17% with the nearest competitor coming in at only 7%. The company’s international operations have even greater market shares closer to about 30%.
While Agrium is the clear market leader, there are still significant opportunities for the company to grow both organically and through acquisitions. For example, 30% of the U.S. market is serviced through small, independent providers. Another 25% is serviced by farmer co-ops. This means that over half of the market could benefit by connecting themselves to Agrium’s sprawling, full-service retail locations.
Agrium has also been able to buy a significant amount of smaller competitors, unlocking value by connecting them to its existing distribution network. Since 2010 the company has purchased 261 locations, adding $1.6 billion in sales and $166 million in EBITDA.
No wonder successful hedge funds are getting interested
With a 3.4% dividend yield, a share buyback that will repurchase 5% of outstanding shares, and plenty of growth opportunities, Agrium looks well positioned for the future. Starting in 2016 the company anticipates generating $7.3 billion in free cash flow over the next five years. With a market cap of only $14.9 billion, shares look like a bargain.
