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Will Agrium’s 1Q16 Gross Margins Weaken?

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Gross margins

Previously in this series, we saw that Agrium (AGU) earns most of its revenues from its retail sales channel. However, when it comes to gross margins, the wholesale channel is more profitable. Overall in 2015, the company reported $3.8 billion in gross profits, or 26% in gross margins, for both the segments combined. Let’s look at what analysts are expecting from the upcoming earnings.

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Estimates

The overall expectations for Agrium’s gross margins are softer for 2016. Wall Street analysts estimate the company will report $544 million in gross profit in 1Q16, which would result in 19.6% in gross margins based on the consensus estimates. This is slightly lower year-over-year from 20.3% in 1Q16.

For the full year 2016, analysts are estimating the company to report $3.6 billion in gross profits, or a total gross margin of 24.6%. The full year gross margin for Agrium is also expected to come in lower from 25.8% in 2015.

What’s happening?

Falling fertilizer prices as a result of softer demand fueled by weakness in crop prices are taking a toll on agricultural fertilizer companies’ margins. PotashCorp (POT) has similar expectations. It’s expected to report gross margins of 32.4% for 2016, down from 39.2% in 2015. The Mosaic Company’s (MOS) gross margin is expected to fall to 15.6% in 2016 from 19.2% in 2015 while CF Industries’ (CF) gross margins are expected to fall to 32.7% in 2016 from 35.9% in 2015. You can track fertilizer prices with our weekly series: Fertilizer Happens: Your Update for the Week Ending April 22.

Next, we’ll look at the EBITDA margins for Agrium, which can also be accessed through the PowerShares International Dividend Achievers (PID). This ETF invests about 1% of its portfolio in the company.

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