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Bear of the Day: Agrium (AGU)

Tracey Ryniec

After flying high on strong fertilizer prices over the last few years, Agrium Inc. (AGU) recently warned on the third quarter as fertilizer prices went soft. This Zacks Rank #5 (Strong Sell) is trading near its 52-week lows.

Agrium produces all three major fertilizers, including nitrogen, phosphates and potash. It is also a retail supplier of agricultural products such as crop protection and seeds in North America, South America and Australia.

Tough Third Quarter Coming

On Sep 23, Agrium provided a third quarter outlook which was pretty grim. Soft fertilizer prices, combined with lower sales volumes, are expected to negatively impact the Wholesale segment's third quarter results.

Agrium said customer demand had been delayed across all the fertilizers in the quarter. Wholesale nitrogen sales plunged 20% and phosphates sales sank 30% from the year ago quarter. Potash was no better, coming in about 30% lower than a typical third quarter.

To add on even more bad news, fertilizer prices were also about 20%-30% lower than the same period in 2012.

Dividend Increased

To placate shareholders, Agrium raised its dividend by $1.00 a share. It is now yielding a healthy 3.4%.

This dividend increase was larger than the analysts had anticipated.

Estimates Sink

Given the gloomy outlook from Agrium, it's not surprising that the analysts moved to cut estimates for both the third quarter and the full year.

The third quarter Zacks Consensus Estimate fell to just $0.82 from $1.53 just 90 days ago. The most accurate estimate was even lower, at $0.69. That's a cut of more than half in just the last 3 months.

For the full year, 10 estimates have been cut over the last 2 months. Earnings are now expected to drop by 13.5% to $8.44. The company made $9.75 in 2012.

Analysts are more tentative on 2014 as they expect earnings to decline only another 0.2%. But that could change after third quarter earnings which are expected in early November.

Shares Tumble

With the fertilizer markets in turmoil over the past few months, it's not surprising that Agrium's shares have been weak.

Agrium's valuation has become more attractive as the shares have slid. It trades with a forward P/E of 10 and a price-to-book ratio of 1.7.

But, the earnings are likely to continue to contract for the next quarter or two. The Zacks Rank is a short term recommendation of 1 to 3 months.

For investors interested in the fertilizer companies, there are no fertilizer peers trading with a Zacks Rank #1 (Strong Buy) or #2 (Buy). All of the companies have the same problems of falling prices and volumes and their earnings estimates are being cut.

But for those interested in the agriculture sector, in general, AGCO Corporation (AGCO), the large agriculture machinery maker, is a Zacks Rank #1 (Strong Buy).

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Tracey Ryniec is the Value Stock Strategist for Zacks.com. She is also the Editor of the Turnaround Trader and Value Investor services. You can follow her on twitter at @TraceyRyniec.

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