Tuesday, March 9, 2010

Agruim Inc (AGU): An Undervalued Fertilizer Company (Part 4)

This is the fourth 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.

Agrium Inc is a Canadian retailer and manufacturer of agricultural chemicals. Its main products are fertilizer and crop protection products. Although the company operates globally, the bulk of its operations are in the US and Canada. This, however, is bound to change due to Agrium’s recent acquisition of CMF and an increasing focus on foreign markets. After evaluating Agrium Inc from different perspectives, we have come to the following conclusions:

Economic analysis: global supply and demand for crops, as well as economic conditions determine crop prices which in turn determine fertilizer prices. Crop prices, although negatively affected by the financial crisis, have been rising due to the expansion of the Asian middle-class, and the recent focus on biofuels. The world population is growing and every year there are an extra 80 million people to feed. Thus, we foresee an increase in the demand for fertilizer and also in fertilizer price.

Industry analysis: the industry as a whole was negatively affected as a whole, but things are expected to return to normal in the short to medium term with moderate growth for the sector thereafter.

Company analysis: the firm has an aggressive acquisition strategy, has shown robust growth, and has a strong management team in place.

Financial analysis: We were not able to calculate intrinsic value because ROE growth is too high! The average annual return for an investor who bought in 1995 and is still holding the stock is 13.5%. This return is higher than the expected return required by CAPM. We therefore conclude that, assuming that this growth rate is sustainable, investing in Agrium stock yields a higher expected return than that warranted by its risk. In addition, the company’s P/E ratio is lower than it’s peers, leading us to belive that it is undervalued. The stock is also currently in an uptrend: a bullish sign.

Based on all of the above information, our conclusion is that shares of Agrium Inc. are underpriced and should be bought.

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