An interior view of the storage warehouse is seen at Nutrien's Cory potash mine near Saskatoon, on Aug. 12, 2019.STRINGER/Reuters
The argument in favour of investing in crop-nutrient producers a decade ago was simple: Farmers needed to boost their efficiency as the world’s population expanded, and nutrients such as potash offered the best hope for a well-nourished planet.
So long, simple. Today, investors are facing enormous complexities underpinned by the fact that there is no shortage of potash in the world amid wavering demand driven by geopolitical tensions and crummy weather.
But should investors approach Nutrien Ltd. as a beaten-up buying opportunity?
The Saskatoon-based company is the product of the 2018 merger of Potash Corp. of Saskatchewan Inc. and Agrium Inc. Although the merger united Potash Corp.’s world-leading potash production with Agrium’s massive retail business, creating a $37-billion global agricultural powerhouse, returns have been disappointing.
Since its debut at the start of 2018, Nutrien’s share price is down 6.1 per cent (not including dividends), lagging the S&P/TSX Composite Index by nearly seven percentage points over the same period.
No wonder investors have given Nutrien the cold shoulder. After rising to bubbly heights in 2008, potash prices declined sharply over the next eight years. The recovery since 2016 has been spotty, weighed down most recently by the continuing trade war between the United States and China and a horrendous U.S. crop planting season owing to a particularly wet spring this year.
“When you have a depressed, multiyear low corn price range, farmers have less revenue and smaller crop input budgets, and that just depresses organic growth in the industry,” Joel Jackson, an analyst at BMO Nesbitt Burns, said in an interview.
Mr. Jackson estimates that global potash demand is on track to fall by one million to 1.5 million tonnes this year, to about 65.5 million tonnes.
Nutrien underscored the problem when it announced last month that it will idle three of its Canadian potash mines in the fourth quarter for as long as eight weeks. Nonetheless, Mr. Jackson believes that the issue with the oversupply of potash is growing, which could continue to weigh on potash prices.
He cut his price target on Nutrien – where he believes the shares will trade in about 12 months – to US$58 from US$60 previously. (The shares trade in New York, where they closed Friday at US$48.47, as well as Toronto, where they finished at $64.48.)
Similarly, RBC Dominion Securities cut its target on the stock to US$60 from US$63. And although Citigroup left its target price unchanged at US$61, it lowered its profit outlook for 2020 to US$3.81 a share from US$3.86 previously.
That’s a lot of gloom. But the upside is compelling.
For one, even with a less than ideal backdrop, Nutrien is wildly profitable. In its second-quarter results, released at the end of July, it reported EBITDA (earnings before interest, taxes, depreciation and amortization) of US$1.78-billion, up 18 per cent from the second quarter of 2018. Revenue increased 7 per cent.
The company raised its quarterly dividend with its second-quarter results, to 45 US cents a share, up from 43 US cents previously. The dividend yield is now 3.7 per cent, offering investors a good payout while they wait for a rally.
In terms of valuation, the stock is hardly expensive. It trades at 18.8 times reported earnings, which is near the lowest price-to-earnings ratio for the stock since it began trading 21 months ago. Using estimated earnings, the P/E is just 17.7, according to Bloomberg.
As well, Nutrien is more than a potash producer: Agrium delivered a 1,500-store retail network with the merger, and this retail division appears to be grabbing market share during these tough times. Jacob Bout, an analyst at CIBC World Markets, noted that Nutrien’s seed sales increased 1 per cent in the second quarter, year-over-year, as the overall market declined.
This diversification is clearly helping the company weather dips in commodity prices, and it is giving the stock some added attractiveness in the eyes of some observers.
“We think Nutrien’s diversification by fertilizer [it produces nitrogen and phosphate in addition to potash] and its retail channel should provide earnings stability despite volatility in commodity prices,” P.K. Juvekar, an analyst at Citigroup, said in a recent note.
Mr. Juvekar thinks the second quarter marked the bottom of the agricultural cycle. If so, it might be worth getting ready for a rebound.
David Berman