Canada-based Nutrien (NTR) is a crop nutrient company that produces and distributes potash, nitrogen, and phosphate products for agricultural, industrial, and feed manufacturers.
With all the global disruptions we have been facing over the past couple of years, it was only natural for the price of commodities to begin increasing. As an agricultural company, it is no surprise to see Nutrien benefitting from the higher prices.
Indeed, the company’s stock price has reflected this benefit by climbing a whopping 39% year-to-date while the major indices are down. However, we are neutral on the stock in the long term because it is a cyclical business during a booming period of inflation that will eventually normalize.
Recent Earnings
Nutrien recently reported earnings for the first quarter of 2022. Unsurprisingly, the results were very strong, with revenue growing at 64% year-over-year. The company also saw impressive operating leverage as profit growth outpaced revenue growth.
Gross profit increased from $1,156 million to $3,257 million, equating to an increase of 182%. Even more impressive was earnings growth, which was 941% higher than in the first quarter of 2021.
In addition, the company significantly raised its guidance for the full year. Previously, the company was expecting earnings per share of $10.20 to $11.80. However, it now expects earnings per share to be in the range of $16.20 to $18.70. That’s a staggering 58.6% increase at the midpoint.
Despite these impressive results, the company still missed expectations on both the top and bottom lines. Revenue missed by $137 million, while earnings per share missed by $0.08.
Nevertheless, the upward guidance revision was enough to send the stock higher the following couple of trading days.
Growth Catalysts
The main catalyst for the company’s expected growth comes from the global supply shortage of almost everything related to agriculture. Grain and oilseed inventories are well below historical averages, which has led to prices being 50% to 90% higher than their 10-year averages.
At these elevated levels, producers will likely increase production in order to benefit from the higher prices. Furthermore, the war in Ukraine has made things worse.
Russia and Belarus make up approximately 40% of all potash production and exports. With the sanctions against these two countries in place, a lot of potash has been removed from the supply chain. Naturally, this has led to higher prices as well.
As a result, Nutrien is stepping up production in order to help reduce the shortage. However, the company itself won’t be able to fill the gap left by Russia and Belarus on its own. Thus, prices will likely remain elevated for quite some time.
In addition, Nutrien announced that it will buy back at least $2 billion worth of stock in 2022. At current prices, that equates to about 3.4% of shares outstanding.
Buybacks are beneficial to shareholders because they increase the earnings per share figure, even if earnings stay flat. This means that even if the valuation multiple and total net income stay the same, then the price of the shares would still increase by 3.4%.
Dividends
For investors that like dividends, Nutrien currently has a 1.82% dividend yield when annualized, which is above the sector average of 1.45%. When considering its payout ratio of 19.6%, the dividend payment appears to be safe.
Taking a look at its historical dividend payments, we can see that its yield range has trended downwards in the past several years.
At 1.82%, the company’s dividend is near the lower end of its range, implying that the stock price is trading at a premium relative to the yields investors have seen in the past.
Why Nutrien Might Not be Good for the Long Term
When investors are deciding whether or not they should invest in a particular stock, they should ask themselves if the company in question is creating value. One way to answer this question is by looking at the economic spread, which is defined as follows:
Economic Spread = Return on Invested Capital – Weighted Average Cost of Capital
The idea is very simple; if the return on invested capital is greater than the cost of that same capital, then the company is creating value for its shareholders through well-thought-out projects. Otherwise, the company is destroying value.
For Nutrien, the economic spread is as follows:
Economic Spread = 14.1% – 9.3%
Economic Spread = 4.8%
At the moment, we can say the company is creating value for shareholders. However, this is because of the extraordinary circumstances mentioned above that have driven the price of commodities through the roof. Under normal circumstances, this isn’t always the case.
The average return on invested capital over the past 10 years was roughly 8.4%, which would be lower than the weighted average cost of capital if we used the current 9.3% value. The ROIC value ranged from a low of 3.1% to a high of 16.4%.
As a consequence of this volatility in earnings, the share price has significantly underperformed the SPDR S&P 500 ETF Trust (SPY) since January 2012. When including dividends, SPY has returned ~300%, while NTR has only gained about 44% during the same 10-year period.
As a result, investors should not fall into the trap of extrapolating Nutrien’s current results too far into the future because commodity prices can change in a flash.
Wall Street’s Take
Turning to Wall Street, Nutrien has a Moderate Buy consensus rating based on 13 Buys, six Holds, and zero Sells assigned in the past three months. The average Nutrien price target of $108.26 implies 3.5% upside potential.
Final Thoughts
Both Nutrien’s business and share price have performed very well this year, with the business likely to continue performing well as long as commodity prices stay elevated.
That said, we remain neutral on the stock because its performance is dependent on the prices of volatile commodities that are influenced by factors that are beyond the company’s control.
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