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On Nov 13, we upgraded our recommendation on Agrium Inc. (AGU - Analyst Report) to Neutral. While we take into account the soft pricing environment and a somewhat weak phosphate market, the company is expected to see strong demand for crop protection products in the fourth quarter.
 
Why Upgraded?
 
Agrium’s adjusted earnings for third-quarter 2013, posted on Nov 5, beat the Zacks Consensus Estimate while sales missed. Profit fell year over year on lower pricing and production outages. Gain in the core retail franchise was offset by declines in other businesses.
 
Agrium, a Zacks Rank #3 (Hold) stock, stands to gain from overall strong fundamentals for the agriculture and crop input market. Outlook for crop protection products is favorable for the final quarter of 2013 driven by greater use of fungicides and residual herbicides.
 
Agrium follows a focused strategy to grow along the value chain through a combination of acquisitions and organic development. The acquisition of AWB has expanded its Retail division and provided access to the growing Southeast Asia market. Moreover, the acquisition of Viterra Inc’s agri-products business is an excellent fit to Agrium’s portfolio, allowing it to offer highly competitive products, services and technologies by combining its experience with Viterra's profound knowledge of western Canadian agriculture.
 
We are also encouraged by Agrium’s commitments to boost shareholder returns. Agrium is committed to deliver value-added growth while maintaining shareholders value. The company recently hiked in its quarterly dividend by 50% to 75 cents per share. It aims to return 25% to 35% of its free cash flows to shareholders.
 
However, 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 near future. The global phosphate market is expected to remain weak, partly due to lower demand from India (a major phosphate import market). Phosphate import is expected to decline in India in 2013 and potentially the next year due to the change in subsidy and currency devaluation. 
 
We also account for the uncertainty in the potash market following the exit of world's largest potash maker Uralkali Group from one of the biggest potash cartels – the Belarus Potash Company (BPC).
 
Other Stocks to Consider
 
Other companies in the basic materials sector worth considering are Methanex Corporation (MEOH - Analyst Report), Asahi Kasei Corporation (AHKSY) and The Scotts Miracle-Gro Co. (SMG - Snapshot Report). While Methanex and Asahi Kasei hold a Zacks Rank #1 (Strong Buy), Scotts Miracle-Gro retains a Zacks Rank #2 (Buy).

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