Nutrien: World Leader In Potash Production (NYSE:NTR)

Nutrien (NYSE:NTR) is the world’s largest producer of potash fertilizers and the third-largest producer of nitrogen fertilizers needed to boost crop yields. Thanks to the fast-growing agricultural products business, increased demand for the company’s products, and rising prices for fertilizers, the company’s EBITDA was $2,439 million in 1Q 2022, up 220% year-on-year. As a result of sanctions imposed against two of the world’s largest producers of mineral fertilizers, namely Uralkali and Belaruskali, the demand for Nutrien products in Europe and South America has increased significantly. As a result, potash sales are expected to be around 14.5-15.1 million tonnes in 2022, which will boost EBITDA by more than $5 billion year-on-year.

With a 2.1% dividend yield, year-on-year growth in operating income, an increase in share buybacks and business expansion in many regions of the world, Nutrien is an excellent candidate for long-term investors.

Company’s Financial Position

Since Ken Seitz took over as CEO in early 2022, Nutrien’s management continues to effectively manage the company’s business, generating $7,454 million in Q1 2022, up 67.6% from Q1 2021.

Despite the significant increase in prices for fertilizers and seeds, which has been observed since 2021, there is a tendency to increase revenue year on year over the past six years, which indicates the ability of the company’s management to find new business opportunities. At the same time, the Price/Sales ratio continues to decline, reaching a value of 1.7 in 2022, which is significantly lower than in previous years. However, it should be noted that this indicator is slightly above the average for the fertilizer and agrochemicals industry, which is one of the factors that may contribute to a short-term correction in the company’s shares in the near future.

EBIT was $1,978 million in 1Q 2022, up 599% year-on-year, a huge increase was driven primarily by increased production of potash and nitrogen fertilizers and higher prices for these feedstocks. In addition, there is a trend toward EBIT margin growth from quarter to quarter and for the 1st quarter of 2022, it was 26.5%, which is 50% higher than the average value of this industry. In my opinion, this trend will continue for the next 4-6 quarters, thereby contributing to the growth of interest from institutional investors.

Nutrien has one of the highest gross margins in the fertilizer and agrochemicals industry. This shows that the company’s management is able to effectively manage the business in a competitive environment, optimize product delivery networks and reduce product costs through innovation.

At the end of Q1 2022, the gross margin is about 43.7%, an increase of 17.7% compared to Q1 2021.

Nutrien debt

Unlike many commodity companies that suffer from a high debt burden, Nutrien has no problems with this, which is especially important at times of Fed and ECB rate hikes, as it will allow a more aggressive policy to expand the business and at the same time minimize financial risks. Total debt amounted to $12,325 million in 2022, up 13.6% from 2021. However, due to the increase in EBITDA, the Total Debt/EBITDA ratio decreased to 1.5 in 1Q 2022, which has a positive effect on the ability of management companies to take financing for their projects in North America and Europe.

At the end of 2021, Nutrien had over $4 billion in debt instruments available. Considering that the company was able to agree on an extension of the maturity date from April 10, 2023, to June 4, 2026, for these obligations, this also allows maintaining the current strategy to expand the business.

In addition, in my estimation, the company has no difficulty in redeeming bonds between 2022 and 2030 because Nutrien’s operating income was more than $6.5 billion in the last year.

Nutrien’s dividend yield of 2.1% is slightly above the industry average. The policy of the company’s management is aimed at not only paying dividends depending on net profit but also carrying out share repurchases. So, the CEO of Nutrien on the earnings call for the 1st quarter of 2022 stated the following.

«And we decided to allocate then $2 billion for share buybacks another $2 billion will come back at the middle of the year and talk about it.»

In my opinion, this strategy has a positive effect on increasing interest from both pension funds and more aggressive institutional investors.

In 2022, investors should receive $1.92 per share, up 4.4% from a year earlier. That being said, I believe that Ken Seitz and the Nutrien board of directors will continue to increase dividends in subsequent years and by 2025 they will exceed $2 per share.

The future of the company’s business

Nutrien operates in more than 30 countries around the world, which allows us to diversify our business and pursue flexible customer service policies, which is a significant advantage in the context of the ongoing COVID-19 pandemic. The company produces more than 27 million tons of potash, phosphate, and nitrogen fertilizers per year and also develops and sells seeds for key crops.

The company is a leader in the production of potash fertilizers, occupying about 20% of the world market. Nutrien sold 13.6 million tons of potash in 2021, up 800 thousand tons from a year earlier. According to the company’s guidance, the positive dynamic is expected to continue in 2022, when sales volumes will be about 14.5-15.1 million tons, which, taking into account the growth in raw material prices, will contribute to Nutrien’s revenue growth by billions of dollars compared to the previous year.

Sanctions against Belarus and Russia

As a result of the unleashing of military aggression against Ukraine at the beginning of 2021, most countries of the world-imposed sanctions against Russia and Belarus, which also included a complete or partial ban on doing business with companies that produce fertilizers. The aggressive actions of Russia and Belarus have been going on for more than 100 days, and to deter them, on June 3, 2022, the European Union adopted the 6th package of economic sanctions, including against Belaruskali and the Belarusian Potash Company. These two companies are global producers of fertilizers, providing about 20% of the world’s potash exports.

In addition, large shipping companies have not yet resumed transportation from Russia. For example, Maersk continues to wind down business in Russia and Belarus, and it is expected that most offices will be closed in mid-2022.

According to my assessment, taking into account all the sanctions imposed since the beginning of 2022, this creates the conditions under which, including the European Union and the countries of South America, they will begin wider cooperation with Nutrien. Thus, the demand for the company’s potash fertilizers will only increase in the near future.

Deadlines for the end of the war between Russia and Ukraine

The war has been going on for four months, and there is still no turning point in one direction or another. The President of Ukraine stated the following.

“Ukraine will take everything back [from Russia]. This is an imperative”

However, fertilizers are usually applied in early spring and autumn for growing crops, as the soil needs to cool down. Otherwise, if the soil is still too warm, then this can lead to negative consequences, namely leaching or denitrification, that is, the process when nitrates are converted to nitrites and then removed from the earth as gaseous oxides. Thus, given the low probability that the war will end in 2022, this creates a need for agricultural holdings to start looking for new suppliers of fertilizers to replace Russian and Belarusian ones to start sowing crops on time. In addition, this will also help to maintain high prices not only for Nutrien’s fertilizers but also for other company products, including seeds.

Commodity prices to peak in 2022

According to the World Bank Group, the price of potassium chloride will be $520 per tonne in 2022, which is 147.6% more than in 2021, thereby providing a significant increase in the company’s net profit.

However, the price of this fertilizer is expected to be $470 in 2023, which at first glance will also have a positive effect on maintaining high business margins, since the cost of potassium chloride is more than 100% higher compared to 2021. However, there will be a 9.6% decline in price in 2023, which could trigger the exit of the most speculative investors, thus contributing to Nutrien’s share price correction in 2022.

Technical analysis

On the daily chart, we see a continuation of the corrective movement that began on April 19, 2022, and at the moment the company’s shares are moving in a bearish channel. From the point of view of technical analysis, this correction was predicted by the fact that the price chart continued to rise progressively from the end of March, showing new highs, while the RSI, on the contrary, began to decline, and as a result, a bearish divergence was formed. In addition, Nutrien moved below the 55 EMA and 89 EMA, which I use in most of my analysis as I believe they are the most accurate predictors of trend reversals. As a result, this is also a significant factor for the continuation of the correction in the near future. Based on fundamental and technical analysis, I expect the bearish trend to continue until a strong support level around $80-81 and then the company’s shares will stabilize.

Conclusion

Nutrien is the world’s largest producer of potash fertilizers and the third-largest producer of nitrogen fertilizers needed to boost crop yields. Nutrien has one of the highest EBIT margins among fertilizers and agrochemical companies, standing at 26.5% at the end of the first quarter of 2022. This shows that Nutrien’s management continues to effectively manage the business through innovation in the production of raw materials and optimization of distribution networks. On the other hand, the World Bank Group estimates that a slight decline in prices for key fertilizers is expected in 2023, which could trigger the exit of the most speculative investors, thereby contributing to a continued correction in Nutrien’s share price to around $80 per share in 2022.

However, with billions of dollars in revenue and EBITDA growth in recent years, rising inflation and fertilizer prices, paying dividends, and increasing production capacity, Nutrien is a great candidate for long-term investors. Based on the catalysts described in the article, I set a price target for Nutrien at $118 per share.