Per a 13D filing with the SEC this week, Jana Partners has increased its stake in Agrium Inc. (NYSE:AGU) by 25%. Jana now owns 9.2 million shares, up from the 7.3 million shares—30% of Jana’s 3Q 13F—that it owned at the end of 3Q. With the purchase, Jana now owns 6.19% of Agrium’s outstanding shares. Rosenstein founded Jana Partners in 2001 after spending time at Sagaponacnk, Plaza Securities and Merrill Lynch. Rosenstein also has a CPA and an MBD from Wharton. By October 2011, Jana Partners had returned a whopping 200% since its inception. Check out all of Jana’s holdings.
Agrium is a major producer of agricultural nutrients and industrial products, but also has a retail segment that supplies agriculture products and services in North and South America. Jana’s investment thesis for Agrium includes the belief that a break up of those businesses, the wholesale and retail, would provide the best value for shareholders. The fund is convinced that there are no cost synergies for the two segments and the combined entity is causing investors to over-discount the retail segment, and we’d have to agree. The conglomerate structure is disadvantageous for Agrium, mainly because of the different skills required to run its varied business segments.
Jana first took a stake in the agriculture products company in the second quarter. The initial position was 6.5 million shares and has grown by 40% since, with Jana trying to put more pressure on Agrium’s management to unlock value for shareholders with a breakup. Earlier this week, Agrium took a hit of almost 6% as the company significantly reduced its fourth quarter guidance; the agriculture company is now expecting to post EPS in the range of $1.50 to $1.90, compared to average consensus of $2.18 a share.
A major issue Jana finds is that Agrium has failed to strategically use its working capital, amassing over $700 million worth in the retail segment that could be used for shareholder value creation. Agrium does pay a modest dividend, yielding 1%, and Agrium has discussed a dividend increase to appease Jana, but the investment firm believes there is more value that can be unlocked, specifically as much as $50 per share – a potential upside of 50% from the stock’s current trading price of $101.
Key competitors include Mosaic Co (NYSE:MOS), Potash Corp./Saskatchewan (NYSE:POT), CF Industries Holdings, Inc. (NYSE:CF) and Terra Nitrogen Company, L.P. (NYSE:TNH). Mosaic recently saw an S&P downgrade as concerns over China and India potash demand continue. Mosaic pays double the dividend yield that Agrium does and has a similar P/E, but slowing growth limits the reason to invest. Mosaic stated that international demand was slowing earlier this month, as distributors delay purchases in an effort to help navigate the slow economy. Mosaic’s next quarter volume estimates are now down from 3.0-3.4 million to 2.9-3.1 million.
Potash is also seeing slowing growth, and is expected to see revenues down 8.7% in 2012. Despite strong fundamentals for the industry, lower volume continues to pressure the company’s top and bottom line growth. Over the long term, a rising global population should increase the demand for fertilizers, which does bode well for Potash, as the potash producer is the quintessential industry leader.
Terra is a CF subsidiary, with CF owning 75% of Terra’s outstanding units, so together, the companies are leading nitrogen producers. Terra pays close to a 7.2% dividend yield. The company took in nearly $840 million in cash from operations during the first three quarters of 2012, while paying out only 40% of that in the form of dividends. CF recently saw a downgrade from S&P due to the USDA’s upward revision to corn and soybean yields, while other headwinds for CF include rising natural gas prices. CF has the lowest P/E, but also has the lowest dividend yield of the stocks we’ve mentioned at only 0.8%.
Agrium trades the cheapest on a P/E basis, except for CF Industries. Agrium currently trades at 11x earnings and CF at 7x, but Agrium remains the cheapest on a P/S basis at 1.3x, compared to CF’s 2.4x. A breakup of Agrium’s operations could also help bring its net profit margin, currently 8%, more in line with the industry average of 20%.
A breakup does appear to have the potential of unlocking value, but other funds have yet to take notice. Jana has increased its position, but other fund owners downsized their positions in 3Q, including Tetrem Capital (-20%) and Cobalt Capital (-50%). We would like to see other funds become bullish, which may lead to a more fruitful discussion between both sides regarding the possibility of a breakup. See all funds that love Agrium.
