Agrium Inc. (TSX:AGU)(NYSE:AGU) shares have gained nearly 21% year-to-date, but the rally may have run its course. The company announced its second-quarter results after market closed on August 6, delivering good growth in its bottom line despite lower revenue. However, investors may have little to look forward to, as Agrium revised its full-year guidance for the second time this year.
How Agrium beat its rival
Agrium’s Q2 net income jumped 10% to US$675 million despite 5% lower sales. Interestingly, the company delivered far better numbers than peer Potash Corp./Saskatchewan Inc. (TSX:POT)(NYSE:POT) in its fertilizer segment—While Potash Corp.’s nitrogen gross profit slipped 27% year over year in Q2 because of low selling prices, Agrium reported a whopping 80% jump in its wholesale (fertilizers) segment’s gross profit, backed by strong nitrogen sales.
One major factor that drove Agrium’s nitrogen margins up was the low cost of key a input, natural gas. Of course, lower natural gas prices should also benefit Potash Corp. But there’s a catch: Potash Corp. sources much of its input from Trinidad, where supply disruptions have held up gas prices, unlike in the U.S., where Agrium sources gas.
What’s behind Agrium’s lower guidance?
Despite such a strong performance from its fertilizer segment, Agrium revised its 2015 earnings-per-share guidance range to US$7-7.50 from US$7-8.25 projected in Q1. So, why is the company being cautious? Its retail segment is largely to blame.
Unlike 2014, which was a record crop year for Canada, sales of seeds and crop protection products have weakened this year because of drought conditions and low farm incomes as a result of weak crop prices. To make matters worse, corn—a major fertilizer-consuming crop—acreage has also gone down in the U.S. this year.
Agrium now expects to generate retail earnings before interest, taxes, depreciation, and amortization of US$1-1.05 billion this year compared with its earlier estimate of US$1.15-1.22 billion.
It doesn’t help that Agrium also projects lower prices for potash and phosphate in the second half of the year, which is also one of the reasons why it lowered its outlook.
Doesn’t that still suggest strong growth over 2014?
You may want to argue that despite a revised guidance, Agrium is on track for solid growth in annual earnings over 2014. After all, it earned only US$5.51 per share from continuing operations last year, which means near 27% growth in earnings per share even at the lower end of its 2015 guidance.
You’re right, but I’m still not convinced that Agrium has a lot of upside from here. I believe much of the optimism about the company’s potential earnings growth this year has already been factored into its share prices, which have jumped more than 20% year-to-date. In fact, Agrium also looks fairly valued right now, trading at 19.8 times trailing P/E compared with Potash Corp., which is demanding a P/E of only 14.5 times currently.
So, considering its recent run up and premium valuation, I wouldn’t be surprised if Agrium comes under pressure going forward.
