Agricultural chemical firm Agrium (NYSE:AGU) currently has its hands full, as it is trying to acquire an arch rival at the same time its business suffers from challenging industry conditions. The market will inevitably improve, but it won't matter for shareholders if management overbids in its attempt to consolidate the market.
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Third Quarter Results
Net sales plummeted 40.1%, to $1.8 billion, as retail sales, which accounted for 66.7% of total sales, fell 25% on weak trends in crop nutrient, crop protection and seed sales. The decline in wholesale sales was more dramatic, falling nearly 60% to account for 35.6% of sales. The wholesale segment manufactures nitrogen-based, potash, and phosphate-related crop nutrient products that are sold to agricultural and industrial customers, as well as through Agrium's retail channel. The third operating unit, advanced technologies, accounted for 3.3% of sales as segment sales fell by one-third. Intersegment sales explain why total sales figures exceed 100%.
Operating earnings fell a severe 88.9%, to $63 million on a broad-based decline in profits across each operating segment. Diluted earnings per share nearly evaporated, falling 93% to 16 cents, but met analyst projections for the quarter. Management attributed the fall in sales and earnings to depressed corn prices given an ideal growing season in North American and subsequent supply, uncertainty over global potash pricing and soybean prices that are 50% "behind normal."
Outlook and Acquisition Update
Agrium management "sees a significant recovery in demand across virtually all crop inputs starting early 2010." Given this industry bullishness, it is using depressed market conditions to further consolidate the competitive landscape and is trying to acquire arch rival CF Industries (NYSE:CF), which also happens to be bidding for Iowa-based industry player Terra Industries (NYSE:TRA). Agrium just sweetened its buyout offer, but CF Industries continues to reject its advances, as did CF in its pursuit of Terra. Yet, both the CF and Terra management teams believe that the respective current bids undervalue their businesses, especially once industry conditions improve. (For related reading, check out Mergers And Acquisitions - Another Tool For Traders.)
The Bottom Line
On a forward P/E basis, Agrium shares are cheap at 9.7-times 2010 analyst expectations. However, industry conditions remain extremely murky and the current love triangle between Agrium, CF Industries, and Terra adds another layer of significant uncertainty. Potash Corp. of Saskatchewan Inc. (NYSE:POT) may turn out to be the real winner, and will remain the larger firm even if the other three players end up joining forces, especially if the winning bids become unreasonable and destroy any chances of benefiting shareholders. (For related reading, check out How The Big Boys Buy.)
