Agrium’s (AGU) gross margins in 2016 stood at 24.8%, a 26.3% fall from 2015. Fertilizer companies like PotashCorp (POT), Mosaic (MOS), and CVR Partners (UAN) have seen their margins contract over the years due to weakening fertilizer prices. On Market Realist, we publish a weekly update on fertilizer price movement, which has been the key profitability driver for many of these fertilizer companies.
Read Why Were Fertilizer Stocks and Prices Mixed Last Week? for the latest update.
Gross margin estimates
For the upcoming 1Q17 earnings, analysts are estimating Agrium to report a gross income of $561 million, which would be about 1.2% higher than the gross income in 1Q16. The gross margins have remained unchanged at 20% year-over-year.
Fertilizer stocks (SOIL) such as Agrium face seasonality in demand, so we must also look at margins on a full-year basis. For the full-year 2017, gross income is estimated to grow by 5.5%, and over the same period, gross margins are estimated to improve from 24.8% in 2016 to 25.3% in 2017.
If we compare Agrium’s higher gross income growth of 5.5% year-over-year in 2017 to the company’s sales growth of 3.7% in 2017, it seems cost optimization is at play, which may explain the Wall Street estimates for gross margin expansion this year.
Let’s look at how Agrium is estimated to do in terms of other operating costs in the next part of this series.