Agrium a Buy with $100 Target
In the second quarter, Agrium Inc. (AGU) reported diluted earnings per share of $4.00, more than double from $1.70 in the same quarter of the previous year. The recently completed United Agri-Products (UAP) acquisition is estimated to have contributed $0.70 diluted earnings per share for the reported period of May 5 to June 30.
Rising global prices for nitrogen, potash and phosphate leveraged by strong demand augur well for AGU. The company also has significant free cash flow. Therefore, we rate the shares a Buy with a target of $100.00.
After the acquisition of UAP, the company's market share increased to 16% in the retail business. The company expects good growth in the seed sales and crop protection chemicals business in 2008 because the UAP acquisition has expanded the depth and breadth of its product line. The company expects annual synergies of approximately $18 million, $80 million and $115 million from 2008 to 2010.
Recently, Agrium concluded the acquisition of 70% interest in Common Market Fertilizers S.A. (CMF), one of Western Europe's largest fertilizer distribution companies. This acquisition is expected to increase the company s purchase-for-resale business by almost 2.5 million tons on an annual basis.
Further, the company plans to expand its retail operations in South America through organic growth and greenfield expansion. It has already identified six sites for expansion in 2008 and 2009. Due to tight supply and strong demand in the ammonia business, the company restarted its smaller Redwater #1 ammonia plant late in the first quarter of 2008.
FactSet Has Increased Competition
FactSet Research Systems Inc. (FDS) is a leading provider of global online integrated data-related products and services for the investment community.
The company continues to demonstrate healthy growth as it expands internationally and enhances its offerings through strategic acquisitions. FactSet's flagship offering, Portfolio Manager Workstation (PMW) is a staple among asset managers.
However, increased competition from companies like S&P pose a growing risk given asset managers may seek to cut costs. Moreover, given large losses at major financial institutions, we are concerned that these institutions will slow spending on analytical tools. Profitability has fallen somewhat for FDS, however much of the fall in net margin is explained by the expensing of stock options. Going forward, the Fundamental Database acquisition will put some pressure on margins through 2009.
Although a falling activity ratio and solvency ratio have contributed to a drop in ROE, we are not concerned about this as it is a result of strong free cash flow that is adding to the equity and asset base.
