Agrium Inc. survived an ugly attack by break-up-minded activist investor Jana Partners last year, and now it's handily surviving weakness in its fertilizer business. In fact, the Calgary-based agriculture conglomerate's stock was little changed after announcing its fourth quarter earnings from continuing operations would be at the lower end of its guidance range, from $0.80 to $1.25 per share. Dive into the numbers just a bit deeper and you'll see why recently retired Agrium CEO Mike Wilson still deserves to be gloating about his victory over Jana. Diversification has worked nicely for Agrium, thank you very much.
Jana claimed victory in a securities filing last October, saying that it had achieved many of the changes it had pursued, but it failed to win shareholder support for its slate of directors or to budge the needle on its key agenda item: To get Agrium to split off its fertilizer production arm from its retail division.
It's easy to make the argument that the two businesses don't quite mix. One produces and sells agricultural inputs (nitrogen, potash and so on), while the other is a retail distributor. Split up, each part would be valued according to its own distinctive metrics and create added value, so Jana's line went.
Flip the argument around, however, and you see why Agrium looks particularly compelling. Thanks to a multi-year strategy of bulking up its retail business primarily through acquisitions, it is now increasingly a retail business (retail accounted for 75 per cent of revenues in the first nine months of 2013; it was less than 40 per cent in 2005) that earns relatively steady margins, with an exciting and much more volatile side business in commodities production that delivers boffo returns in good times, with a more muted impact when the tide turns.
With more retail comes greater stability. The two businesses "are driven by the same [agriculture] cycle but there is less volatility on the retail side," said National Bank Financial analyst Robert Winslow. The evidence is in the gross margins: In retail, they might fluctuate by a couple of percentage points but generally stay around 22 per cent from year to year; In fertilizers, they fluctuate wildly, dropping by almost half, from 38 per cent during the peak year of 2008 to 21 per cent one year later. And in the first nine months of 2013, they fell to 28 per cent from 34 per cent in the same period from a year earlier). And sure enough, while the fertilizer business is looking weaker in the fourth quarter, Agrium expects record results from retail, thanks to higher margins. "Investors may find greater comfort in the strong performance of retail and the momentum it could carry into 2014," Altacorp Capital analyst John Chu wrote in a note Tuesday, after praising the company last week for offering "better stability than its peers" in the agriculture space.
Surely the cost to investors of reduced risk is reduced returns? Maybe. Compare Agrium to the two other Saskatchewan potash miners, Potash Corp. and Mosaic Co., and you see the others enjoyed far greater share spikes during the run up in prices prior to the credit crisis. But guess which stock was the hands-down best performer among the three in 2012 and 2013? Agrium. Its stock has also outperformed its two peers over the past three years, five years and seven years, its dividend has risen more than its two peers in the past three years, and it is much less tied to the volatility in fertilizers, particularly the potash market.
Fertilizer prices will rebound some day, no doubt bringing greater momentum to the shares of Potash and Mosaic, for a while. Longer term, Agrium has positioned itself as the better bet.
Sean Silcoff