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Agrium Inc. (USA) (AGU): Food for Thought

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A recent statement by Mr. Mike Wilson, president and chief executive officer of Agrium Inc. (USA) (NYSE:AGU), had me thinking of the potential that exists concerning investments in the agricultural chemicals industry in the basic materials sector.

In February, he said:

The unrelenting global demand for food has continued to pressure global grain supplies, leading to continued strength in crop prices. We believe there is a compelling economic incentive for growers across the world to plant record acreage in 2013 and to optimize their use of crop inputs.


Agrium Inc.

The essence of this comment is the “unrelenting global demand for food.” ReutersNina Chestney, senior environmental markets correspondent in London, reported in a January article:

Even by 2030, the world will need at least 50% more food, 45% more energy and 30% more water, according to U.N. estimates, at a time when a changing environment is creating new limits to supply.

Putting the two comments together, there’s clearly an opportunity for astute agribusiness companies to make somewhat of an impact concerning global food supplies. I’ve been looking at Agrium Inc. (USA) (NYSE:AGU), and the support it can offer the world in terms of helping ease the food crisis is clear. What the stock can offer investors willing to bet on this market sector is equally clear.

Agrium Inc. (USA) (NYSE:AGU) provides crop inputs and services. The company is a major retail supplier of agricultural products and services, a leading international wholesale producer and marketer of all three major agricultural nutrients (nitrogen, phosphate and potash), and a supplier of specialty fertilizers. It had record results for the fourth quarter of 2012 and additionally matched the record annual earnings that were achieved in 2011. There are three reasons you should consider Agrium Inc. (USA) (NYSE:AGU) as an investment.

1. The sales potential of its retail business unit

For the 2012 fourth quarter, retail sales grew by 8% to $2 billion in comparison to the fourth quarter of the prior year.

Here’s the potential of this unit; think of the farmer who wants to optimize the potential of his or her crops. Farmers are at the mercy of the weather, market prices for their crops, infestation, energy prices, and more.

One way to protect crop investments is to buy crop protection and crop nutrient products. Guess who’s providing these and seeing its retail division grow because of increased sales of these products?

2. The gross profit potential of its retail business unit

The retail segment’s gross profit grew $57 million in the fourth quarter. Crop protection products increased 40% for the quarter versus the comparable 2011 period. Gross profits of $509 million represented the highest fourth-quarter results ever for this segment.

3. Agrium’s full-year retail EBITDA (earnings before interest, taxes, depreciation and amortization)

Why is this important? It’s important because, as an investor, you want to know how much money an enterprise is actually making before it starts factoring in the necessary deductions for the above-listed items. Therefore, you know what a company’s income is before the deductions are made from that number. However, not all expenses are factored into EBITDA. Consequently, it’s important as an investor to consider a company’s cash flow, as well.

Nonetheless, Agrium Inc. (USA) (NYSE:AGU)’s 2012 EBITDA was $951 million. This represents an increase of 24% in comparison to 2011’s record results of $769 million.

In a letter to shareholders dated March 4, Agrium conveyed that the company’s performance has made it possible for its board of directors to raise the dividend in tandem with the increase in earnings and cash flow. Agrium has raised its dividend 18 times since 2010.

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