Agrium, Inc. (USA) (AGU)

The analysis presented is based on a price of $47.08.

AGU is an interesting stock. In addition to having good value qualities, there may be a way to purchase at an additional discount if you believe that AGU bid for CF will result in an acquistion.

Since 2001, the EPS has generally been growing. Although EPS starts in the negative, for the 2004-2008 period EPS has been positive and grew to $8.34 in 2008. Return on equity has exceeded 14% in four of the last five years, and exceeded 20% in three of those years. In six of the eight years, free cash flow has been positive but inconsistent.

Before I look at the valuations, I look at three indicators of financial safety. For this stock, all three are quite good. The Altman Z is 4.3; below 1.8 is risky, above 3 is the safe range. The Piotroski F is 5; 2 or below indicates caution, while 8 or 9 indicates that the stock is expected to rise within the next year. The Sloan accrual is 3.35; 5 or higher is high risk, while -5 or lower is excellent.

I use more than one valuation method to gauge intrinsic value; all of the first three provide a good margin of safety (MOS). The first three are standards in the valuation literature. The estimate based on Graham’s formula was $247 (81% MOS). The Earnings Power Value (value of the firm) was estimated, on a per share bases, to be $115 (59% MOS). The Discounted Cash Flow (DCF) estimate valued the stock at $103 (54% MOS).

The last two were based on a spreadsheet found on the AAII website; these are designed to mimic Buffett’s valuation methodology. One is based on projecting EPS growth 10 years into the future based on past EPS growth; I discount the resulting valuation to reflect the price at which the stock will realize a compounded earnings (including dividends when applicable) return of 15%. Based on this method the target purchase needs to be below $55, and at the current price there is a 15% MOS.

The second is based on estimating EPS growth through the sustainable growth rate. The per-share projected book value is estimated by taking the previous year’s book value, adding EPS and subtracting dividends (when applicable). The projected EPS is estimated by multiplying the projected book value by the average Return on Equity, and the projected dividend is estimated by multiplying the projected EPS by the average payout ratio. I then discount the resulting valuation to reflect the price at which the stock will realize a compounded earnings return of 15%. The results of this method, do not recommend purchase of this stock because the price of the stock is already greater than the valuation estimate of $41.

To ascertain that the price is attractive to me, I take one more thing into consideration. At the current price, would I expect an immediate 15% return on my investment (ROI) based on earnings and dividends? In this, the EPS represents about 14.3% of the share price by itself, so the dividend yield is needed. However, the .2% dividend was not enough to achieve the desired 15%.


AGU looks to be a good investment based on its own merits, but if you think AGU will acquire CF, then the purchase of CF is the better way to buy AGU – it effectively gives you a 9% discount (which improves all of the MOS calculations); the risk is that if you truly want AGU, the merger may not happen. If you also think that CF will acquire TRA, then there is an additional potential discount (albeit with similar caveats and an extra layer of complexity).