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Analyst Blog

On May 30, we downgraded leading fertilizer company Agrium Inc. (AGU - Analyst Report) to Underperform following its disappointing first-quarter 2013 results. Our view reflects the weak phosphate price environment, weak demand in India and unfavorable weather conditions.

Why the Downgrade?

Both revenues and earnings for the first quarter, reported on May 9, missed Zacks Consensus Estimates. Lower revenues from the larger Retail segment coupled with adverse weather conditions hurt the top line. Agrium witnessed lower sales for crop protection products and crop nutrients in the quarter. Moreover, weak global demand hurt its phosphate business.

Earnings estimates for Agrium are declining following the release of the first quarter results. The Zacks Consensus Estimate for 2013 has gone down roughly 6% to $9.55 per share. The Zacks Consensus Estimate for 2014 has also declined roughly 2% to $9.72. With Zacks Consensus Estimates for both 2013 and 2014 going down, Agrium now has a Zacks Rank #4 (Sell).

Cause for Concern

While Agrium may benefit from high crop prices and overall strong fundamentals for the crop input market, demand for potash and phosphate is expected to be weak in India, a key market. Changes in pricing and subsidy policies by the Indian government are expected to continue to affect demand in the country.

Moreover, the pricing environment for phosphate is expected to remain soft in the second quarter. The global phosphate market is expected to remain weak in the near term, partly due to lower demand from India (a major phosphate import market). We also account for unfavorable weather conditions which may hurt crop yields.

Other Stocks to Consider

While we prefer to stay away from Agrium, other companies in the basic materials sector with favorable Zacks Rank are American Vanguard Corp. (AVD - Snapshot Report), OM Group Inc. (OMG - Snapshot Report) and Ferro Corp. (FOE - Snapshot Report). While both American Vanguard and OM Group retain a Zacks Rank #1 (Strong Buy), Ferro carries a Zacks Rank #2 (Buy).

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