Agrium Shares Upgraded to 'Buy'

CALGARY, Alberta (TheStreet) -- TheStreet.com's stock-rating model upgraded fertilizer seller Agrium(AGU Quote) to "buy." The company is scheduled to report its third-quarter results before the market opens on Nov. 4.

The numbers: Agrium's second-quarter profit decreased 42% to $370 million, or $2.35 a share, as revenue grew 6% to $4.1 billion. Its gross margin fell from 32% to 23%, and its operating margin dropped from 20% to 13%. Agrium's quick ratio of 1 demonstrates adequate liquidity. Its debt-to-equity ratio of 0.4 is below the industry average, indicating conservative leverage. We give Agrium a financial strength score of 7 out of 10, equal to the "buy"-list average.

The stock: Agrium has advanced 67% this year, outpacing major U.S. indices. The stock trades at a price-to-earnings ratio of 11, a discount to the market and agriculture peers. The shares pay a 0.3% dividend yield, less than the S&P 500 average of 2.6%.

In the past year, Agrium shares have climbed 62%. They've gained 23% annually, on average, in the past five years. In both cases, the stock outperformed U.S. benchmarks.

The outlook: Despite lower revenue and margins, Agrium remains an attractive fertilizer stock. On the basis of trailing earnings, Agrium is 56% cheaper than its peer group. The stock is also inexpensive when you consider its sales, book value and cash flow per share. Several top-down factors make the fertilizer industry attractive, including a steadily increasing global population, the shift towards protein-rich diets in emerging economies and the need to use land more efficiently.

Sector rotation: Competitor Monsanto(MON Quote) reported a wider fiscal fourth-quarter loss on Oct. 7, while Mosaic(MOS Quote) delivered significantly weaker revenue and earnings on Oct. 5. However, fertilizer stocks exploded yesterday, with Mosaic up 4%, Potash Corp.(POT Quote) climbing 6.5% and Agrium jumping 7.7%. Cheap shares, takeover rumors and demand speculation are pulling investors into the agricultural space.

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