Hedgeye's Agrium Short Thesis Has Lots Of Charts But Little Analysis, Scotiabank Says

Agrium Inc. (USA) (NYSE: AGU) is down more than 5 percent on the day, at $83.47. The Canada-based producer, marketer and retailer of agricultural products was recently covered in a report issued by Hedgeye (HRM), a risk management and independent investment research business.

Hedgeye suggested earlier in the week that holding a short position in Agrium could be beneficial for investors. Bloomberg reported the firm sees as much as a 50 percent downside in Agrium shares.

The original Hedgeye report stated it's "easy to get to half [of today's] share price" and demonstrated how Agrium could dip to $27.

However, Scotiabank is wary toward the analysis, stating, "The presentation has lots of charts, with little analysis, in our view."

Related Link: Agrium Short Recommended By Hedgeye, Sees 50% Downside In Stock; Shares Selling Off

Scotiabank's Views And Downgrade

"The crux of HRM's thesis is that the ag market is only halfway through a cyclical downturn that will ultimately reflect something similar to the 1980's (when interest rates were 8 percent to 15 percent). It's true, farm land values have fallen, which has led to an increase in demand for credit, and therefore higher D/E ratios.

"But, where HRM misses the mark, in our view, is: (1) the magnitude of the impact; and (2) where the impact will be felt," Scotiabank's Ben Isaacson explained.

Isaacson then listed three areas that were not fully detailed in the HRM report:

• "Demand for new equipment like John Deere tractors should fall, as capital investment is deferred."
• "Demand for crop inputs should not be materially impacted."
• "N, P, K demand continues to grow while corn has fallen steadily from $8/bu to $3/bu."

Furthermore, Isaacson stated that Scotiabank had to do some creative figuring to match the conclusions HRM came to regarding Agrium. "To achieve HRM's $4/share EPS scenario in 2017, we had to cut Retail volume by 25 percent and pick the worst quarterly margins since 2009. HRM failed to mention that AGU's Retail margins have been increasing over the past four years. HRM then suggests a 10x to 12x P/E on torugh earnings ‘may seem generous,' despite calling for a cyclical downturn, which would imply above-average multiples, not below-average ones."

The analyst concluded by recommending investors buy Agrium, "Buy AGU. Hopefully, more insightful analysis can be found here."