Nutrien (NTR) appears to have a sound combination of value and growth characteristics, with a dividend yield twice the level of the S&P 500 typical rate. If you are searching for a play on the farm economy, food inflation, and global population expansion, the company could be a wonderful long-term holding for your portfolio. Nutrien’s diversification of sales between potash, phosphate and nitrogen fertilizers for farmers, steady profit margins during relatively cyclical commodity swings, and history of strong execution by management are the bullish fundamental reasons for ownership. To boot, grain prices are high in early 2022, giving farmers plenty of profit margin to buy additional fertilizer for this year’s growing season.
The company’s health is highly correlated with movements in the grain market, especially the profit margin for U.S. and Canada farmers, with operations/sales mainly focused on North America. The good news in 2021-22 is current spreads between growing costs and grain selling prices are quite high, making fertilizers easily affordable, and a worthwhile input cost to pump up even better income stories for growers. Below is a chart of the Nutrien stock quote tracking corn, soybean and wheat prices the last four years.
A terrific explanation of the correlation of fertilizer demand/pricing vs. grain prices and margins for farmers is part of the company’s November Investor Presentation highlighted below.
Forecasts for 2022-23 by the company, based on continued strong pricing for grains, were also part of this Investor Presentation, with slides estimating future operating performance pictured below. The summary is elevated grain prices beyond today’s level should bring about an exceptional spike in profitability and cash generation by the operating business.
Nutrien’s value and growth characteristics are not mind-blowing individually, but taken together should support a rising price trend similar to the second half of 2021. Current price to trailing metrics on earnings, sales, cash flow, and book value are on the lower end of the valuation spectrum vs. its recent four-year history. (The company was formed through the merger of PotashCorp and Agrium, in a transaction that closed on January 1, 2018.)
The stock is also trading at a lower-than-normal forward P/E valuation on estimated 2022 results vs. fertilizer industry peers Mosaic (MOS), Corteva (CTVA), FMC Corp (FMC), CF Industries (CF), Scotts Miracle-Gro (SMG), ICL Group (ICL) and South America’s Sociedad Quimica y Minera de Chile SA (SQM).
Over the last three years, net profit margin has been near the industry average, largely because the company carries a higher debt load than others. If it can focus on debt reduction in 2022-23 with record cash flows and earnings, its leading economies-of-scale position in the marketplace could produce an industry high rate of income on sales.
Adding Nutrien’s $12.5 debt load to its $40 billion equity capitalization, enterprise value to earnings before interest, taxes, depreciation and amortization highlights an overall cheap buy proposition vs. peers. Only Mosaic’s smaller and historically more cyclical earnings swings are valued at a lower ratio of EV to projected EBITDA presently.
Wall Street has become aware of Nutrien’s improving operating future over the last 12 months, and has bid its stock quote dramatically higher. Its total return including dividends of +40% soundly bested the equivalent S&P 500 advance of +25%, and was slightly stronger than the peer group mean average of +32%.
On the daily chart of trading activity over the past two years, drawn below, you can review the consistent gains since the pandemic selling low in March 2020. As of today, the Nutrien quote is trading above its 50-day and 200-day moving averages, and a variety of momentum indicators are in a healthy to positive position.
The 14-day Average Directional Index has risen some from its September bottom, and is not signaling anything close to an overbought condition requiring a stretch of flat pricing (consolidation phase). In addition, I rate the Negative Volume Index and On Balance Volume readings as healthy over the intermediate term, while stronger than most in the fertilizer industry.
Nutrien’s short-term trading direction will likely mimic grain market movements. If you believe like I do that excessive money printing the world over by central banks will support rising fiat money prices for commodities, Nutrien should make a solid pick for your portfolio. Just like 2021, better-than-typical total returns vs. the S&P 500 may be in NTR’s future.
Seeking Alpha’s Quant Ranking for Nutrien is near the top of the heap, scoring 95% better than its 4000+ stock universe for momentum trends in price and earnings beats vs. analysts forecasts, among other variables.
What could go wrong? Of course, day-to-day labor wage pressures and supply chain problems from the pandemic are hitting Nutrien. Yet, this situation is being felt by competitors around the world. The main risk to the business model is grain prices stagnate or decline in 2022. This would lower margins for farmers, and disincentivize the purchase of fertilizers at an exaggerated rate.
Perhaps a bigger short-term risk than a major grain price drop would be a bear market on Wall Street for equities generally. The U.S. stock market may be the most stretched for underlying mathematical valuations and overconfidence by retail investors in my 35 years of trading. Both setups argue for weaker U.S. stock market in 2022. If we get a large, rapid drawdown of 20% or greater in the first months of the year, Nutrien’s quote will be equally impacted.
I am modeling upside to $100 a share is possible in 12-18 months, while downside to $50 is likely in a stock market crash-like scenario into summertime. So, we have +45% for a total return upside projection in a best-case scenario over 12 months vs. -28% in a worst-case sell-off happening all at once, sooner rather than later.
I rate Nutrien between a Buy and a Hold today, around $70 per share, depending on your specific risk tolerances and portfolio goals. A sell-off to $65 or even $60 would be a welcome development for long-term buyers (all other important variables remaining the same), as the risk/reward equation would become far smarter for ownership. I personally do not own shares at the moment, but may purchase a stake on price weakness.
Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.
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