Agrium-How Cyclical is this?

Agrium (AGU) is the largest publicly traded agricultural retailer in North America and one of the world's largest producers of agricultural fertilizers, nitrogen, phosphate, and potash. AGU is a unique platform in that it crosses the whole value chain with fertilizers, crop protection products, and seeds. The company, originally part of Cominco, a large Canadian mining company understands cycles, and has clearly sought to minimize them in its strategy.

The company has done that through global diversification.The company markets its products to all reaches of the world, doing retail business in Argentina, Chile, and Brazil as well as China.

In a recent interview with The Wall Street Transcript, the CEO Mike Wilson describes the tightening fundamentals for grain globally. Significant changes in diet are taking place among the Chinese. As Wilson points out, it takes 3.3 pounds of grain to produce a pound of pork and almost 8 pounds to produce a pound of beef. Dietary changes from Chinese staples to a more North American diet (God help them!) maintains the long term demand for grain.Combine this with shrinking supply of arable land, and the dynamics of the fertilizer business grow.

Similarly, the growing demand for bio-fuel and ethanol will result in growing demand for corn, sugar cane, and other crops production. I would far rather use this as a lower risk approach to the ethanol industry.

The valuation of Agrium suggests that the market remains concerned about its cyclicality. EV/EBITDA is about 6.8 times for trailing twelve months EBITDA. On an EV/EBIT basis, AGU trades at 9.8 times. The ROIC is about 13% on a TTM basis, partially reflecting the just completed and yet to be integrated acquisition of Virginia based Royster-Clark which has over 250 farm centers throughout the U.S.

The company reported a disappointing first quarter as a result of losses on natural gas hedges of about $43 million resulting in an operating loss of $48 million. The first quarter for a fertilizer company tends to be weak seasonally.

The company has generated CFFO in excess of its reported net income for at least the last five years and generated FCF every year since 2002.

Year......Net Income.......CFFO.........FCF

2005......285M...............450..............275

2004......276M...............449..............367

2003......(21M)..............189................90

2002..........0..................224...............172

2001.......(45M)..............87................(77)

At current levels, the company has a market cap of $2.8 billion, a cash position of $300 million and long term debt of $477 million for an enterprise value of $3 billion. Analyst estimates for 2006 range from $1.43 to $1.95, a huge range! Estimates for long term growth are around 6%.

This remains a show me stock, whose strategy to reduce cyclicality is still not believed. In my view, this is still perceived as a pure fertilizer company, rather than having the multiple businesses that it now manages.

Disclaimer: Neither I, nor my family have a current position in Agrium. However, certain clients have a current position in Agrium.