I don’t own a position in Nutrien Ltd. but that may change in the coming weeks. There are both short and long term reasons to like the stock, but also some important questions I’d like answered before committing investment capital.
Nutrien provides agricultural products to farmers – fertilizer, crop protection (like pesticides) and seeds accounted for 86 per cent of revenue in the most recent quarter.
The company’s most recent earnings report saw profits and guidance well above expectations. Fourth quarter earnings at $2.47 easily exceeded estimates for $2.38. Management announced 2022 earnings guidance of about $11 per share, a full dollar ahead of the analyst consensus at the time of reporting.
Importantly, these estimates did not reflect the Russian invasion of Ukraine and the potential for trade sanctions against Russia. Russia is the world’s largest producer of nitrogen, phosphorous and potassium (NPK) fertilizer and the country’s removal from the export market would cause a sharp rise in global prices.
Crop prices are elevated and this historically has boosted demand for fertilizer. Citi analyst Aakash Doshi noted “decade-long highs in both futures and cash crop prices should incentivize acreage expansion, particularly for grains like corn and wheat.” However, fertilizer prices may climb to levels that restrict demand.
In an in-depth research report earlier this week, BofA Securities strategist Haim Israel outlined the potential for food scarcity in the coming years that will further boost fertilizer prices. Mr. Haim noted the distinct possibility that phosphorous production will peak in 2030 while a World Wildlife Fund estimate indicates that global farmers will have to produce more food in the next 40 years than the entirely of harvesting for the past 8,000 years.
Despite the promising outlook, stock valuations remain attractive. The trailing price to earnings ratio of 13.3 is about half of the five year average of 26.4. Price to cash flow data is only available for the past two years but the current 5.5 times is significantly below the recent a 6.8 times average.
I have two big questions about Nutrien that I haven’t been able to answer with emails to analysts. Most importantly, earnings growth is expected to jump 88 per cent year over year in 2022 but then fall by 39 per cent in 2023. I’ll have to know why before buying the stock.
Secondly, I do not have a good handle on the revenue effects of the massive drought in the southwestern United States. Mr. Haim described the drought as the worst in 1200 years and cited evidence that it will last until 2030. Nutrien generates 70 per cent of its revenue south of the border.
Regional drought conditions will be positive for crop prices and, as Citi noted, will encourage more planting and fertilizer demand where it’s possible. On the other hand, farmers in the southwest looking across land resembling the Sahara desert won’t be buying fertilizer or crop protection products and I’m not sure how this balances out.
-- Scott Barlow, Globe and Mail market strategist
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The Rundown
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