Nutrien Ltd. – A Value Stock With Big Cyclical Upside?

A screen of thousands of global stocks looking for significant value characteristics turned up a limited number of companies – 11 to be precise. The metrics used to search for established, large-cap companies that operated financially attractive businesses while also trading at value multiples turned up mostly energy and financial companies, which makes sense given current fears over financial contagion in the United States and the highly cyclical nature of the oil & gas business. 

Another cyclical business, however, that the screen turned up was Nutrien, Ltd. NTR, which has some very attractive characteristics making it an interesting name for investors seeking both a margin of safety and significant potential upside with a long-term view. The following thesis will incorporate two key factors for the long-term potential of this name – first, current valuation, and second, leverage to the cyclical upside in agricultural prices. 

Attractive Valuation 

Nutrien was formed in a merger between major fertilizer companies PotashCorp and Agrium in a transaction that closed on January 1, 2018. We delve into a potpourri of valuation metrics, all of which suggest that NTR is extremely cheap and offers significant upside leverage to potash and agricultural crop prices in the coming years. 

Average EBITDA for the last 5 quarters has been $2.71 billion, which annualizes out to $10.84 billion vs. a current Enterprise value of $47 billion and a market cap of $36 billion. This yields an EBITDA/EV ratio of 4.33 or a yield of 23% using this metric, where the EBITDA figure is an average of the last 5 quarters. 

According to Yahoo Finance data, NTR has a Book Value Per Share of $50.90, which once deducted from Tuesday’s market price of $74.88, gives an equity value to the operating business of $23.98 per share. For the trailing 12-month period, diluted EPS was $14.18, suggesting that this business is currently incredibly cheaply valued on a trailing earnings basis. 

This is also supported by a host of other metrics. The $23.98 per share equity value of the business translates to a market value of roughly $12 billion, which compares to levered free cash flow of $4.63 billion for the trailing 12-month period, giving a free-cash flow multiple of 2.6 or a trailing free-cash-flow yield of 38.5%. 

The relative cheapness of the operating business can also be seen using the ubiquitous P/E ratio. The stock trades at a trailing Price/Earnings ratio of just over 5 and a Forward P/E of 7.67 as of April 18. 

The final key piece of information that should get investors' attention with regard to a margin of safety vis-a-vis current valuation is that the stock is currently yielding 3.83%, which represents an annual payout of $2.87. Although this yield is relatively less attractive given the huge run-up in Treasury yields over the last year, it still remains very compelling and should provide a floor under future price declines. 

Operating Metrics

A look at the previous five year’s sales numbers is also very promising, given the current valuation of the stock, which appears to be pricing in a decline in sales and a sharp decline in earnings in the coming years. Nevertheless, top-line sales have risen sharply over the last two fiscal years after three consecutive years of very low growth from 2018-2020. 

In the ensuing two years, however, revenue has surged from roughly $20 billion in 2020 to $37 billion in fiscal 2022, which represented a sharp 38% increase over 2021 sales. The trajectory is very positive, although it does appear that earnings in 2022 were abnormally high vs. years prior. 

Additional measures that can help investors evaluate the quality of the business are compelling. The profit margin in fiscal 2022 stood at 21% while operating margins were just under 27%. Return on assets was a respectable 12% and return on equity was an extremely attractive 31%, a figure that the market is clearly skeptical NTR can maintain. 

The Street’s View 

Nineteen brokerage firms have coverage on the Canadian fertilizer giant. The stock has one sell rating, eight hold recommendations, and seven buy ratings. The average price target for the stock on the Street is $92.00, which compares to a current share price of under $75.00. This represents a one-year estimated return of 23%. 

Goldman Sachs GS currently has one of the higher price targets on the Street at $120.00, which would represent a 60% annualized gain from current levels. Given the stock’s depressed valuation, however, there are a number of scenarios that could provide for even bigger upside from current levels – specifically, global supply constraints along with persistent inflation could push prices for agricultural crops substantially higher over the next 52 weeks, and potash prices would likely follow, potentially triggering a sharp and sustained rally in NTR shares.  

The Thesis  

A detailed look at the NTR chart shows that the stock has been trading in line with corn, wheat, and potash prices along with other agricultural commodities. The 52-week high in NTR was around $112 in April 2022. This coincided with peak near-term prices in corn, wheat and potash, all of which have fallen rather precipitously from Q1 and Q2 2022 levels. 

Potash, for instance, which is NTR’s primary product, has fallen from $1202 in April 2022 to $453 in April 2023. That is a very significant decline that has dragged NTR shares down along with it. Over the course of the last 52 weeks, the stock has lost nearly 35%. 

It is likely that the spike in crop and fertilizer prices that topped out in April 2022 was driven in part by the white-hot pace of inflation. The sell-off in these commodities has coincided with the Fed raising interest rates at a record pace and some moderation in inflation. 

Nevertheless, a strong argument could be made that another huge run-up in agricultural prices could be in the cards if some unforeseen circumstances materialize, such as constrained global supply due to geopolitical tensions and inflation that remains more persistent than the market is currently anticipating. 

In theory, what this may look like is a reversal in the Fed’s hawkish interest rate policy due to economic weakness and continued constraints in the U.S. financial sector, which has been roiled by a number of bank failures. 

If the Fed were to pivot in the coming quarters and begin to cut rates, which the bond market is anticipating, this may cause inflation to pick up once again, giving all commodities a very strong bid. Furthermore, if tension with China were to continue to escalate and the geopolitical situation in Europe deteriorates, this would likely create a perfect storm for crop prices. 

Under such a scenario, it is not unrealistic for NTR to be trading above $150 a year from now. 

Featured photo by Christophe Maertens on Unsplash