Agrium Inc : A double bottom

06/12/2012 | 05:52am Opinion : Bullish above 78  Target price : 87.8  Stop loss: 77.9

TORONTO STOCK EXCHANGE Chemicals - Agricultural

Agrium is a major retail supplier of agricultural products and services in North America (75% of sales), Australia (15% of sales) and Asia and South America and a leading global producer and marketer of agricultural nutrients and industrial product. The company produces and markets three primary groups of nutrients : nitrogen, phosphate and potash. The retail represents two-third of sales and one-third for the wholesale.

In early June, the firm released two mains news. On the one hand, it announced dividend to more than double. The semi-annual dividend will be USD 0.50. According to Agrium’s President and CEO, Nike Wilson, it is “an indication of the strength in [their] earnings outlook”. On the other hand, the company expects to be near top end of guidance range for its first half earnings.

Agrium operates in an increasing industry because agricultural production always needs to be improved. Crop prices soar because of the food supply-demand balance and the world population is expected to keep its high growth rate for decades. In order to produce more, farmers need nutrients. Moreover, the group has a strategy of acquisition and is in one of the biggest deal of the industry, the Glencore’s Viterra acquisition.
However, the company operates in a competitive industry. Its mains competitors are Potash Corp., The Mosaic Company or Monsanto. Furthermore, Agrium is highly exposed to fluctuations in exchange rates because its functional currency is the USD and its operations are worldwide. Finally, the firm uses a lot of petrochemical products and there is a risk of increasing prices. This can squeeze net margin.

Fundamentally, the company has a strong liquidity position with a current ratio of 2.08 for 2011. It has one of the lowest PER in the industry. It is the same thing for the EV/EBITDA. Sales are estimated to increase sharply over the coming years. EPS and revenue revisions are very good. Lastly, its dividend is rising and in August, Q2 results are likely to beat analysts’ estimations.

Technically, a double bottom is forming on the CAD 78 support. If this pattern is confirming in the coming days (by an increasing volume), price would break up the CAD 83.5 resistance and rise to the CAD 87.8 resistance. This one is very strong because it is also the weekly resistance.

Due to graphical analysis, investors can buy the stock immediately. The target price is CAD 87.8. To avoid important losses, a stop loss will be fixed at CAD 77.9.

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