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Agrium Slips to Neutral

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We are downgrading our recommendation on leading fertilizer company Agrium Inc. to Neutral factoring in its weak fourth quarter outlook. The company posted tepid third-quarter 2012 results with adjusted earnings of $1.11 per share trailing the Zacks Consensus Estimate of $1.81. Its profit slid 56% year over year on weak potash demand.

Revenues fell roughly 6% year over year to $2,962 million, also falling behind the Zacks Consensus Estimate of $3,094 million. The company saw lower sales across its Retail and Wholesale segments in the quarter.

Retail sales dipped 9% as early harvest and severe drought conditions in the U.S. hurt demand for some crop inputs products. Wholesale segment revenues declined 3% due to the downtime at the company’s Vanscoy potash facility.

Agrium stands to gain from rising crop prices and overall strong fundamentals for the agriculture and crop input market. The company follows a strategy to grow along the value chain through a combination of acquisitions and organic development.

The acquisition of AWB has expanded Agrium’s Retail division and provided access to the growing Southeast Asia market. Moreover, the acquisition of Viterra’s agri-products business is expected to support its earnings in 2013.

The company expects high crop prices and tight grain inventories to create higher demand for its nutrients. It envisions strong demand for top quality seeds in the 2013 growing season. Agrium is also expected to benefit from healthy demand for urea in India and Brazil.

However, weak overseas potash demand stemming from the uncertainty associated with new supply contracts with China and India is impacting pricing for the nutrient and is expected to significantly affect overseas shipment volumes in the fourth quarter.

Results in the fourth quarter are expected to be lower compared with the year-ago quarter as the company anticipates a significant decline in international potash demand and lower ammonia sales in Western Canada due to unfavorable weather conditions. Moreover, global phosphate market is expected to remain weak in the near term, partly due to lower demand from India.

Agrium, which competes with CF Industries Holdings Inc. (CF - Free Report) and Potash Corp. of Saskatchewan Inc. , retains a short-term (1 to 3 months) Zacks #3 Rank (Hold).

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