Tuesday, February 2, 2010

Agruim Inc (AGU): An Undervalued Fertilizer Company (Part 3)

This is the third part of a series of posts relating to a thorough analysis of Agrium and what led to conclude that it was a company worth your attention for a further analysis. Part one can be found here.

Dupont Model analysis

Net profit margin:
Between 2007 and 2008, the net profit margin went from 8.37% to 13.18%, a significant increase of almost 5%. In 2008, the industry had an average profit margin of 5.19%. This increase in profit margin is mainly due to savings in general and administrative expenses, depreciation expenses and other non-operating income. (Annual report 2008)

Asset turnover:
The asset turnover increased from 1.16 to 1.28 between 2007 and 2008. Each dollar invested in the asset generates 1.28$ of sales. The industry’s ratio in 2008 is 1.02. Hence, Agrium’s asset was used efficiently.

Financial leverage (Asset/Equity):
2007-2008: It went from 1.89 to 2.39 meaning the company incurred more debt. This is due to the acquisition of CMF.

EBIT/Assets: 0.2
Interest/Liabilities: 0.018
Positive leverage, it’s a favourable debt, so when asset on equity increases ROE increases


Both EBITDA Margin and Gross margin increased from 2007 to 2008 and both are above the industry level thanks to the growth in sales.

ROA (net profit margin x asset turnover):
Almost doubled from 9.69 (2007) to 16.84 (2008) because of net profit growth.

Liquidity Management

Current Ratio:
Between 2007 and 2008, Agrium’s ratio decreased from 2.83 to 1.82, while the industry average raised from 2.26 to 2.94.

Quick ratio:
2007 and 2008 the ratio decreased from 1.84 to 0.57 and a constant 1.3 for the industry.

The company may have some liquidity problems after the new acquisitions. To begin with, the company’s ratio is lower than the one of industry. The difference between the current ratio and the quick ratio demonstrates that the company holds to many inventories which are often less liquid. As a result, Agrium may face short term reimbursement challenges.

Debt Management

Interest Coverage:
2008: 18.91 ≥ 1, therefore Agrium is able to pay the interest.

Total Debt to Equity:
An increase from 0.25 (2007) to 0.39 (2008) with an almost constant industry ratio of 0.29
This is due to the new issued long term debt. As we observe an raise in the LT Debt to Equity ratio from 0.25 to 0.39.

Asset Management/productivity

Receivable turnover:
Still below the industry because of high accounts receivable

Inventory turnover:
Diminished from 6.17 (2007) to 4.99 (2008), and it’s still below the industry’s ratio (7.6). The reason of the low inventory turnover ratio is because of the high amount of inventories.

Property Plant & Equip Turnover:
Both ratio in 2007 (3.39) and in 2008 (5.24) are higher than the ones of industry. This represents 1$ of capital assets generates 5.24$ of sales.

Cash & Equivalents Turnover:
In 2007, 6.39, lower than the industry (14.78)
In 2008, 13.04, got better, but still lower than the industry (16.15)
This shows possible liquidity problem.

Quality of managers

Evaluating management quality objectively is quite a difficult task. If we compare the performance of Agrium to its peers, we can see that Agrium is much more efficient. Given Agrium’s stellar performance, we assume that management must be doing something right. In addition, we watched Agrium’s conference call and we found that they left a good first impression. They seemed like diligent and competent people. It is also worth noting that Agrium’s CEO, Mike Wilson, was honoured as business person of the year by Calgary Inc magazine for his various accomplishments that made Agrium a “strong, vibrant international corporation.” Last year, Agrium’s CFO, Bruce Waterman, was nominated Canada’s CFO of the year by PricewaterhouseCoopers LLP.

Company prospects

Despite of the unprecedented bad year for fertilizer in 2008-2009 that was due to the economic downturn, Agrium is expecting strong future growth in its retail and wholesale divisions. Indeed, Agrium is poised to benefit from the strong agricultural forecast. Based on its growth strategy and value-creation throughout the supply chain, the company plans to expand wholesale operations to further optimize earnings. It has planned strategic acquisitions and other expansion/growth initiatives across the agricultural value chain: 9 acquisitions ($3.5 billion invested) and other growth initiatives (Potash expansion of 40% increase in capacity by 2013 well on its way, nitrogen production facility in Egypt on schedule, ESN expansion, etc.), in addition to its 4 acquisitions in Retail in North and South America (over $3 billion invested). As shown in the graph below, Agrium’s goal is to double earnings from stable Retail and AAT base, and significantly grow capacity across all three nutrients.

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