Outperform on Agrium Inc.

We are retaining our Outperform recommendation on leading fertilizer company Agrium Inc. ( AGU - Analyst Report ) following its strong second-quarter 2012 results. Adjusted earnings of $5.43 per share topped the Zacks Consensus Estimate of $5.36, while profit surged 20% year over year to a record level.

Revenues spiked roughly 10% year over year to roughly $6.8 billion on the back of strong demand for all crop input products. Sales beat the Zacks Consensus Estimate of $6.5 billion.

The company's core retail segment posted sales of $5.2 billion, a year-over-year surge of 12%. Crop nutrient sales jumped 12% to $2.4 billion as farmers took advantage of favorable crop prices and increased nutrient purchase. Revenues from the wholesale segment marginally rose to $1.7 billion while sales from the Advanced Technologies division climbed 13% to $178 million.

The company expects crop yields to be lower in 2012 owing to the severe drought in the U.S., resulting in high grain prices. High crop prices (especially for corn) and tight grain inventories are expected to create huge demand for its crop nutrients.

Agrium stands to benefit from skyrocketing crop prices and overall strong fundamentals for the agriculture and crop input market. The company is poised to gain from the U.S. Midwest drought in the remainder of 2012.

Moreover, Agrium follows a strategy to grow along the value chain through a combination of acquisitions and organic development. The acquisition of AWB has expanded the company's retail division and provided access to the growing Southeast Asia market.

Agrium recently said that it has no plans of splitting its retail operation. The company also noted that it will continue pursuing its business strategy of generating strong results while boosting shareholders' returns.

We expect strong global demand for fertilizers and seeds to boost Agrium's results in 2012. However, the global macroeconomic situation presents some risks that can potentially impact agricultural markets.

Agrium, which competes with CF Industries Holdings Inc. ( CF - Analyst Report ) and Potash Corp. of Saskatchewan Inc. ( POT - Analyst Report ) , maintains a Zacks #2 Rank, implying a short-term (1 to 3 months) Buy rating.