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Agrium: Feeding The World, And Your Income

Summary

The investment thesis for Agrium is simple, solid and straightforward: "Feeding a Growing World."

Agrium is a global, well-diversified crop input company with a unique competitive advantage.

A strong and steady cash generator with the most diverse business model in the industry.

The investment thesis for Agrium (NYSE:AGU) is simple, solid and straightforward. It can be summarized in four words, which are also its slogan: "Feeding a growing world."

Continued global population growth, plus a growing middle-class in emerging markets with changing diets, is spurring an ever-increasing demand for increased food production. According to the United Nations, the current world population of 7.3 billion is expected to reach 8.5 billion by 2030, 9.7 billion in 2050 and 11.2 billion in 2100. To meet the needs of this growing population, with its changing diets, food production will have to double in 30 years to help solve the current food crisis. Agrium offers investors exposure to the growing global demand for agricultural products.

This increased food production will have to occur on less available arable land. This can ONLY be accomplished by intensifying production. The world will not be able to meet its food production goals without fertilizer. Today, commercial fertilizer is responsible for delivering 60% of the world's food production.

Agrium Inc. is a diversified global leader in agricultural products and services, with revenue of $14.8 billion in 2015. Agrium is diversified geographically as well as through its business model, as it operates through two complementary business units - Retail and Wholesale. This is a unique competitive advantage for Agrium. None of its fertilizer competitors has a retail business.

Agrium Wholesale owns 16 production facilities in North and South America, two mines, and a distribution and storage network throughout North America and internationally through Agrium Europe. Agrium Retail operates a growing number of retail locations, currently about 1,400, plus 57 terminals, 8 plants and 18 distribution centers in North and South America, and Australia.

Agrium Wholesale produces, markets and distributes nitrogen, phosphate and potash products for agricultural and industrial customers around the world. The primary end customer for Agrium's wholesale products is the agriculture market to enhance crop yields and quality.

While the majority of Agrium's production is used for agricultural purposes, about 15% goes to industrial applications. The bulk of Agrium's wholesale industrial sales volume comes from ammonium nitrate, ammonium sulfate, ammonia, phosphoric acid, nitric acid and urea, produced at its North American nitrogen facilities and sold in Canada and the U.S. Urea, for example, is used for the production of resins in the construction industry and potash for the recycling of aluminum.

Agrium's competitive advantages are anchored by its unique business model, combining primary fertilizer production and manufacturing together with the world's largest direct-to-grower distribution network. This unique business combination enables the company to achieve higher plant operating rates, leverage its size and scale with suppliers, achieve significant logistics and distribution synergies and gather detailed market intelligence globally from all levels of the crop input chain. In addition, because Agrium is the largest agricultural retailer in the world, its retail segment has significant purchasing power.

(Source: Agrium)

Agrium's shares may not be for every investor, as each individual investor has their own unique investment and cash flow objectives. To understand why I am recommending Agrium now as a long-term hold, it is helpful to have some knowledge of my investment approach, which can be summarized in four compound words: long-term, large-cap, value-oriented, dividend-growth. For additional details, please refer to my recent interview in the business section of The Globe and Mail newspaper, entitled "A Long-Term Outlook Helps This Investor Weather Market Volatility".

I focus on companies that fit this four-phrase portraiture - companies in which I hold a position, or companies I am researching for the purpose of making an investment decision. I currently hold an underweight position in Agrium (3%). Last week, I purchased additional shares of Agrium at C$107.29. Given my long investment horizon, I considered the timing was favorable last week to add to my position. The stock had sold off from a 52-week high of C$139.99 ($110.21) and entered a technically attractive range last week, trading below the RSI buy signal of 30. Given the recent run-up in the TSX, Agrium was one of only two stocks on the TSX at that time with an RSI buy signal - the other being Empire Co. Ltd. In neither case were the stocks trading above their respective 200-day moving averages.

Management of soil fertility has been the preoccupation of farmers for thousands of years. Ancient civilizations used minerals or manure to enhance the productivity of their farms. Mirat, a...


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