With the overall TSX closing the year down almost 10%, having a stock post a positive gain is an impressive feat. This is even truer when that stock partially operates in the commodity space with leading competitors that are down 35% and 40%.
Yet this is exactly what Agrium Inc. (TSX:AGU)(NYSE:AGU) accomplished. Agrium is set to close the year up 15%, despite the TSX being down, its closest competitors Potash Corp. and Mosaic being down nearly 40%, and prices for crop nutrients (like potash and nitrogen) plunging.
With 2015 being one of the worst years in recent memory, Agrium’s outperformance reflects the strength of its franchise. While the stock is certainly not as deeply undervalued as it was last year at this time, a steady growth trajectory and Agrium’s best-in-class status means 2016 could be another good year.
Agrium is poised for a market recovery
In a recent investor presentation, the CEO of Potash Corp. (one of Agrium’s key competitors) said he could not imagine the market getting much worse than it was in 2015, and he would be entirely right in saying so.
Agrium primarily produces and sells nitrogen and potash fertilizer through its wholesale segment, as well as crop protection products, seeds, and nutrients through its retail segment. On the wholesale front, Agrium’s realized prices for both potash and nitrogen hit multi-year lows, hurting the wholesale operations.
On the retail side, U.S. farmer income fell 38% in 2015, which was the greatest annual drop since 1983, hitting a 13-year low in the process. This is due to crop prices hitting new lows, which pressures farmer incomes as well as demand for crop nutrients and products.
Fortunately, 2016 is expected to be a better year. Agrium has a positive outlook for corn prices and expects the corn stocks-to-use ratio (which measures how much demand there is for corn relative to available supply) to decline, which should support corn prices. This should occur as demand catches up with the record harvests of the past few years.
At the same time, land rental rates for farmers are coming down (falling 20% in 2015 as opposed to 15% in 2014), and these factors should support farmer margins. In fact, Agrium estimates that grower cash margins will increase 20% in 2016, and this is expected across all major crops. These would be the best margins since 2013 that are only slightly below the 10-year average.
Better farmer economics should translate into more crop input expenditures. After farmer spending on crop inputs declined 3% in 2015 and had no growth in 2014, 2016 is expected to be the first positive year since 2013 with crop input expenditures expected to grow 1-3%.
Growth opportunities leave room for upside
While the market may give Agrium a boost in 2016, Agrium can still generate excellent earnings growth even if conditions stay weak. On the wholesale side, Agrium expects potash sales volumes to grow considerably through 2017, as Agrium benefits from ramped-up production from its recent one million tonne expansion of its Vanscoy potash mine.
Due to this ramp up, Agrium will be able to sell more tonnes the international market through Canpotex (the marketing company with Mosaic and Potash Corp.). Agrium will also be able to use its extensive retail network to sell product to the North American market and, as a result, Agrium expects its potash volumes to increase from 1.78 million tonnes this year to 2.4 million tonnes next year. Agrium will have similar growth in its nitrogen segment.
Analysts at TD expect 10% earnings growth next year. Due to this, Agrium is currently the most expensive of its peers (trading at 12.4 times 2016 earnings, compared to 11.3 for Potash Corp. and 10.8 on average).
Despite this, Agrium is currently trading at its lowest multiple of forward 12-month earnings since late 2014, despite having an excellent and steady growth outlook. This means that Agrium could have much more upside in 2016, especially as the overall agriculture market improves and investors start to come back to the sector.