Stock Analysis & Ideas

Nutrien: Cultivating Returns on High Demand

Nutrien Ltd. (NYSE: NTR) is in the perfect position to capitalize on the growing demand for fertilizer products, and its efficacy in fulfilling such demand is evident in both its stock and financial performance.

The current geopolitical situation has brought a great deal of attention to the agriculture industry, with Ukraine being a major producer of wheat, corn, and barley. Concurrently, a large portion of fertilizer, a necessary and complementary good to agriculture, is produced in Russia and Belarus, with Russia producing 13% of the world’s total potash, phosphate, and nitrogen fertilizers.

Due to the ongoing conflict, not only is the planting season in Ukraine threatened, with the grain harvest predicted to fall by 55%, but most of the fertilizer produced is trapped in these countries. Even if crops are successfully planted, there will still be additional challenges, as transporting them out of Ukraine could be impossible.

As a result, growing levels of demand are being hindered by less supply, not only leading to shortages but proliferating the already-present inflation.

Agricultural and fertilizer products need to be produced, nonetheless, turning all eyes to North America, and as agricultural production increases, such producers are looking toward companies such as Nutrien to satisfy their demand.

Nutrien, based in Saskatchewan, Canada, was founded in 2018 and has since become the largest global crop inputs and services company, producing and distributing millions of tonnes of potash, nitrogen, and phosphate products.

With a long-term perspective, the company prides itself on addressing economic, environmental, and social priorities, focusing on stakeholders.

I’m bullish on Nutrien.

Excellent Performance

With a strong foundation rooted in solid fundamentals and a positive outlook toward creating additional shareholder value, Nutrien has generated an over 90% return in the past year, well above the ~15% return of the S&P 500.

This increase is certainly justified, with Ken Seitz, Interim President and CEO, commenting, “The advantages of Nutrien’s integrated business were demonstrated in 2021 as we delivered record financial results and made significant progress on our long-term strategic targets, including our key sustainability priorities.”

He continued, “The outlook for global agriculture and crop input markets is very strong, and we are well-positioned to deliver significant growth in earnings and free cash flow in 2022.”

Such favorable financial results begin with substantial margins, with an ~18% operating margin and 11.7% net margin. Similarly, the return on equity is 13.7%, with a return on assets of 6.5%.

Although the company has experienced negative economic profit from 2016 to 2019, in which the weighted average cost of capital exceeds the return on invested capital, essentially destroying value, it has been rising since 2017, recovering to an over 4% spread in 2021. This means that the company is now creating value.

In Q4, $1.2 billion in net earnings were generated, an increase of 282% quarter-over-quarter, with a record adjusted EBITDA of $2.5 billion, up 221% quarter-over-quarter. The same positive trend continued into full-year 2021 results, earning $3.2 billion of net earnings, increasing 593% year-over-year, and another record for adjusted EBITDA, increasing 94% to $7.1 billion.

This translates into $5.52 diluted net earnings per share and $6.23 adjusted net earnings per share, increases of 581% and 246% year-over-year, respectively.

According to the company, free cash flow also increased 135% year-over-year, from $1.83 billion to $4.3 billion, enabling additional opportunities to create shareholder value through reinvestment into the business, dividends, and share buybacks. In fact, throughout 2021, $2.1 billion was returned to shareholders through dividends and share repurchases, and the business plans to allocate a minimum of $3 billion to dividends and share repurchases in 2022.

This exponential growth is certainly impressive, though it can be partially attributed to rising selling prices across the industry due to higher energy prices and global production outages. Regardless, sales growth still increased and is expected to do so in 2022.

Looking toward the future, Nutrien provided 2022 guidance of a low of $10.20 adjusted net earnings per share and a high of $11.80; this includes the aforementioned plan to devote a minimum of $2 billion to share repurchases. Adjusted EBITDA is expected to follow suit, ranging from a low of $10 billion to a high of $11.2 billion.

It is obvious that Nutrien has reaped financial success, not only due to the current environment but also because of the market in which it operates.

A Favorable Market with Barriers to Entry

Nutrien faces little competition in this industry, holding 22.2% market share in the potash market. Magnified by the Russia-Ukraine crisis, Russian potash fertilizer producer and exporter Uralkali, which has previously held 13.3% of the potash market share, is unable to operate normally due to the ongoing conflict.

This only leaves two major North American players: CF Industries Holdings, Inc. (CF) and Mosaic Co. (MOS).

As a result, Nutrien undoubtedly operates within an oligopolistic market, in which a few large companies dominate the market due to barriers to entry, granting a great deal of pricing power and a sustainable competitive advantage.

For example, fertilizer producers are subject to strict regulations as a result of the potentially hazardous and polluting nature of fertilizers. Furthermore, the company has not only carefully managed capital expenditures to ensure the necessary infrastructure to maintain pace with increasing demand, but it has also established economies of scale, especially through its network of flexible, low-cost potash mines.

It is obvious that Nutrien is in the right market to exploit growing demand, and it has already implemented measures to do so.

Nutrien’s Response to Increasing Demand

In response to the uncertainty of production in Eastern Europe, Nutrien recently stated that it intends to increase its potash production capacity to ~15 million tonnes, increasing by almost 1 million tonnes compared to previous estimates. This equates to a nearly 20% increase in production compared to 2020 and will account for over 70% of global production added during this period.

In reassuring shareholders that the integrity of the company will not be jeopardized along with this increased production, Seitz explained, “Nutrien is responding to this period of unprecedented market uncertainty by safely expanding potash production to help provide our customers with the crop inputs they need.

“We continue to closely monitor market conditions and will evolve our long-term plans to ensure we utilize our assets in a safe and sustainable manner that benefits all our stakeholders.”

Such production is expected to slightly raise capital expenditures as the company hires additional workers, though this should be easily facilitated through the abundant free cash flow Nutrien has generated.

Wall Street’s Take

Turning to Wall Street, NTR stock currently comes in as a Moderate Buy. This is based on 12 Buys and six Hold ratings assigned in the past three months. The average Nutrien price target of $103.62 implies -0.14% downside potential, with a high price target of $126 and a low of $63.20.

Conclusion

The Russia-Ukraine conflict has unquestionably disturbed and likely eliminated a great deal of supply, especially pertaining to agriculture and fertilizer production, prompting increased demand from suppliers in other parts of the world. 

Even before this newly established demand, however, Nutrien has been growing substantially and delivering impressive financial and stock performance to stockholders.

As a result of efficient and effective capital management, thus creating barriers to entry in this market, Nutrien has placed itself in the perfect position to ride this tailwind of increased demand into future success.

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