This series, brought to you by Yahoo! Finance, looks at which upgrades and downgrades make sense, and which ones investors should act on. Today, our headlines feature upgrades for both old-tech The Dow Chemical Company (NYSE:DOW) and new-tech Riverbed Technology, Inc. (NASDAQ:RVBD) alike. The news isn’t all good, however, so before we get to those two, let’s find out why it may be…
Time to bury Agrium
Like the rest of the fertilizer industry, shares of Agrium Inc. (USA) (NYSE:AGU) got punished last week on news that the breakup of the global potash (NYSE:POT) duopoly might put a crimp in its business. More diversified Agrium didn’t fare as poorly as potash-centric Potash Corp./Saskatchewan (USA) (NYSE:POT) and Mosaic Co (NYSE:MOS). Its shares still took a hit of 9%, however, and are falling again this morning on news that analysts at Stifel Nicolaus have decided to throw in the towel and remove their buy endorsement. But was that the right call?
Probably… yes. But not for the reason you might think.
Producing each of nitrogen, phosphate, and potash fertilizers, among other things, Agrium Inc. (USA) (NYSE:AGU)’s business is split at least three ways at both the retail and wholesale levels. As such, it’s going to be significantly less affected than Potash Corp./Saskatchewan (USA) (NYSE:POT) or Mosaic Co (NYSE:MOS) by the duopoly development. Hence, I’m not sure the stock deserves to be punished right alongside Potash Corp./Saskatchewan (USA) (NYSE:POT) and Mosaic Co (NYSE:MOS).
But that doesn’t mean I’d buy the stock, either. Seems to me, if you want an excuse to sell Agrium Inc. (USA) (NYSE:AGU), all you really need to do is look at the stock price: 8.6 times earnings looks to be a wee bit too much to pay for a 5.3% grower with a 2.4% dividend, like Agrium. The more so when you notice that Agrium Inc. (USA) (NYSE:AGU) only generated about $421 million in real free cash flow over the past year — a mere fraction of the $1.5 billion in GAAP “earnings” it reported.
That discrepancy between earnings and free cash flow, I think, combined with the high price you’re being asked to pay for either flavor of profits, is reason enough to avoid Agrium Inc. (USA) (NYSE:AGU) today.
Dow Chemical reacts positively
One company with an agro-science angle to it that’s not being affected by the potash kerfuffle is The Dow Chemical Company (NYSE:DOW) (which gets about 11% of its revenues from sales of crop protection chemicals, seeds, traits, and other plant biotechnology products).
The Dow Chemical Company (NYSE:DOW) is opening the week higher on an upgrade to buy from Argus Research, which thinks an improving global economy will be especially helpful to The Dow Chemical Company (NYSE:DOW), and foresees sales of certain commodities businesses adding cash to the company’s coffers, as well. What’s more, this looks like the kind of analyst upgrade I can get behind.