It’s hard to overstate the importance of fertilizer in the advancement of human civilization over the past thousands of years. Fertilizers are added to major crops in order to allow these crops to grow bigger and faster and produce higher yields. Fertilizers provide crops with essential nutrients like potassium, phosphorus and nitrogen, which has been one of the most important factors in feeding the world as it has grown to almost 8 billion people.
The world's largest fertilizer company is Nutrien Ltd (NTR, Financial) which was formed in 2018 as a result of the merger between PotashCorp and Agrium. Nutrien produces the three main crop nutrients - nitrogen, potash and phosphate. Its main focus is potash, where it is the global leader with the largest market share. The company is also the largest agricultural retailer in the U.S., selling fertilizers, crop chemicals, seeds and related services directly to farm customers through both its physical stores and online platforms.
The company’s potash operations represent over 20% of global potash capacity which is more than 20 million tons. The nitrogen operations represented 3% of global nitrogen capacity while phosphate operations represented approximately 3% of global phosphate capacity. The company has a history dating back to the 1930’s and currently has a market capitalization of approximately $40 billion.
With prices for its commodities remaining high due to global food shortages caused by record droughts in many countries as well as the Russia-Ukraine war, let's take a look at Nutrien to see whether it could be a compelling investment opportunity.
Global market outlook
I predict that the global grain stocks-to-use ratio (an industry measure of supply and demand) will likely decline to the lowest level in more than 25 years, which is being driven by reduced corn and wheat production expectations in the U.S. and Europe. As a result of historically tight supply and demand imbalances, current prices for corn, soybean and wheat are 25% to 50% higher when compared to historical 10-year averages. This would provide incentives for farmers in fertile areas to increase production, which would benefit Nutrien.
Potash shipments from important countries are expected to decline due to the Russia-Ukraine war. Specificly, shipments from Belarus are projected to be down 50% to 60% and shipments from Russia are expected to be down 20% to 25% in 2022 compared to the prior year.
Nutrien lowered its global potash shipment forecast to between 60 million and 62 million tons in 2022, largely due to the impact of higher-than-expected inventory and cautious buying in North America during the second half of 2022. However, the company expects robust agricultural fundamentals will support increased potash consumption in 2023 and believes higher demand will emerge as inventories are drawn down and prices stabilize.
Nitrogen prices continue to trade at elevated levels, driven by historically high European natural gas prices that have led to significant reductions of ammonia and downstream nitrogen products. Shifts in global nitrogen trade flows have led to higher U.S. exports and lower import volumes, which is expected to result in a tight North American supply and demand stituation in early 2023.
Recent earnings
Due to favorable market dynamics, Nutrien reported strong third-quarter results. Sales increased 36.0% to $8.2 billion and adjusted Ebitda increased 50% to $2.5 billion compared to the prior-year period. Adjusted earnings per share increased 136% to $2.51. These gains were due to higher selling prices and global supply uncertainties. However, these numbers were far below analysts' expectations due to lower shipments of potash.
Free cash flow was strong at $1.5 billion compared to $862 million in the prior-year period (this measure of free cash flow excludes non-cash working capital changes).
The company has repurchased approximately 40 million shares so far this year for a total of approximately $3.5 billion. Nutrien plans to allocate approximately $4 billion to share repurchases for the full calendar year of 2022.
The company’s balance sheet is strong with $12.5 billion in debt and $823 million in cash. The company is expected generate EBITDA in the $12.0 billion to $13.0 billion range this year so the leverage ratio is not elevated at this time.
Valuation
Nutrien recently lowered its guidance for adjusted Ebitda for the year to the range of $12.2 billion to $13.2 billion because of a recent decline in potash prices. Full-year 2022 adjusted net earnings guidance is in the range of $13.25 to $14.50 per share. Consensus analyst EPS estimates are $14.00, which puts the stock selling at a forward price-earnings ratio of just 5.2 times.
The reason for the low forward price-earnings ratio is that earnings per share are expected to decline in 2023 as commodity prices such as potash are expected to retreat. Based on current estimates for Ebitda in 2023, the company is selling at an enterprise-value-to-Ebitda ratio of 4.
The GuruFocus discounted cash flow calculator gives us a fair value estimate of $73.00 when using $10.00 in earnings per share as the starting point (a significant decline from recent earnings) and a long-term growth rate of 4.0%. However, this is a cyclical stock, so investors must be aware that it will always follow a boom and bust cycle rather than a linear one.
The company pays an annualized dividend of $1.92, which equates to a dividend yield of 2.62%.
Guru trades
Gurus who purchased Nutrien stock recently include Dodge & Cox and First Eagle Investment (Trades, Portfolio). Gurus who have reduced or sold out of their positions recently include Steven Cohen (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio).
Conclusion
U.S. agricultural chemical sales are likely to improve due to decreased food supply, which would positively impact Nutrien. Prices for all three nutrients that Nutrien sells have likely bottomed by my estimates given that strong demand is expected through 2024. Nutrien's retail segment should remain strong amid improved organic volumes and continued M&A activity.
Nutrien is a high-quality company with a dominating industry position, and the stock appears to be undervalued at this time after recent sell-offs by my estimates. I believe the near-term potential for Nutrien is strong as commodity prices should remain supportive.
