If you’re searching for a Canadian stock to sum up the challenges of this unusually murky period in investing history, let me point you in the direction of Nutrien Ltd. NTR-T, a big, reliable provider of a vital but boring product. The share price of the giant potash producer has gyrated wildly over the past three years for reasons that have little to do with the company’s own operations.
Its trajectory turned erratic when COVID-19 struck the world in early 2020. Nutrien, which had been trading around $62 a share, slumped to below $40, as stock markets crashed. Then, in tandem with the broad market, it staged an impressive recovery, more than doubling its share price.
Its gains went into overdrive when Russia invaded Ukraine in early 2022. The international community slapped sanctions on Russian potash producers and tightened them further on Belarusian producers of the key crop nutrient. Suddenly, Nutrien – an unglamorous, unloved stock two years earlier – was worth more than $140 a share.
Unfortunately for Nutrien shareholders, the glow has faded since and the past few weeks have been particularly cruel. Earlier this month, the company reported disappointing first-quarter earnings and dialled down its guidance for the rest of the year. As of Friday afternoon, shares had slumped to around $83.60 each on the Toronto Stock Exchange and US$61.85 on the New York Stock Exchange.
To my mind, the company offers an interesting microcosm of investors’ big challenge these days: How do you adjust your portfolio to reflect a world that has become radically uncertain?
In the case of Nutrien, the uncertainties include how the Ukraine war will wind up and how global trade with China will evolve. These are complex, cloudy issues.
The keen minds on Wall Street and Bay Street seem just as baffled as anyone else. After the first-quarter earnings debacle, analysts at Barclays slashed their target price for the stock to US$80 a share (from US$93 previously) but insisted they still like the company’s prospects and continue to “see attractive relative upside potential.” Similarly, CIBC analysts axed their share-price target to US$92 (from US$105 previously) but reiterated their “outperformer” rating on the stock.
If the experts are shuffling their feet so furiously, how should ordinary investors approach the stock? A good first step is to ask yourself whether you are evaluating it as a short-term play or as a long-term position.
Buying Nutrien as a short-term play makes little sense – not only is it suffering from negative momentum, but there is no obvious catalyst to turn it quickly around.
Longer term, though, Nutrien still has appeal. It remains the world’s biggest single producer of potash. It is also a sizable producer of nitrogen and phosphate, both vital agricultural inputs.
Right now, it is offering a decent dividend yield – about 3.4 per cent. It is also cheap on some key measures. Consider, for instance, how its enterprise value – the net value of all its debt and equity – stacks up against its forecast earnings before interest, tax, depreciation and amortization. Despite lowered earnings estimates, Nutrien’s forward EV/EBITDA is still under six. That is well below its historical average, according to CIBC.
This bargain valuation bodes well for future share price gains if the world returns to normal. “We see good value here even if it’s a little messy,” Joel Jackson, a Bank of Montreal analyst, wrote this week. He has a price target of US$90 on the shares, based on the notion that Nutrien’s EV/EBITDA ratio will recover and settle around eight.
The problem is it isn’t clear that the world will return to normal. For that matter, it’s not clear what normal looks like any more. Prior to the Ukraine invasion, Russia and Belarus produced about 40 per cent of the world’s potash exports. When postinvasion sanctions crimped those exports last year, potash was suddenly in short supply and prices soared.
This year, the opposite story has prevailed: Potash prices have slid 19 per cent since January. Some targeted producers appear to have begun to find ways around the restrictions, especially when it comes to meeting Chinese demand. “Supplies from Belarus continue to arrive in China by rail despite sanctions that limit Belarusian shipment options,” Bloomberg reports.
Meanwhile, North American potash inventories have hit unusual heights. Farmers aren’t rushing to buy potash given the slide in futures prices for corn and soybeans. Those falling prices mean less financial incentive to invest in nutrients that could boost crop yields.
You can construct many scenarios around what will come next. Perhaps the Ukraine conflict drags on for years and Belarusian and Russian potash producers remain under a cloud. Or maybe China turns to those countries for all its potash needs as the world increasingly splits into separate trading blocs. Or perhaps the conflict ends abruptly, the sanctions disappear, and the world is suddenly awash in potash.
The uncertainties are high and difficult to assess with any precision. Sure, it’s possible to make the case that Nutrien’s relatively low valuation makes its stock a tempting value buy for patient investors. But with crop prices languishing and the durability of sanctions in question, it’s not obvious the potential reward outweighs the risk.
As with much of today’s stock market, waiting for a better buying opportunity seems like a fine strategy.