On today’s Breakouts report, there are 69 stocks on the positive breakouts list (stocks with positive price momentum), and just seven stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that is on the positive breakouts list. On June 4, the share price rallied 3 per cent on high volume, closing at a record high.
In 2021, the company is expected to deliver robust year-over-year earnings growth driven by positive industry conditions. The company started the year off on a positive note, reporting first-quarter financial results that sharply exceeded the Street’s expectations causing the share price to spike 4 per cent the following trading day. Management increased its earnings outlook for 2021 with many analysts modestly increasing their target prices; however, analysts’ target prices may prove to be too conservative.
In August, the company may report another blockbuster quarter, its seasonally strongest quarter, that may give the share price another boost. Year-to-date, the stock price is already up 27 per cent. The stock highlighted today is Nutrien Ltd. (NTR-T).
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Saskatchewan-based Nutrien produces low-cost potash, nitrogen, and phosphate, nutrients which are used to fertilize crops. Nutrien has four main operating segments: retail, potash, nitrogen, and phosphate. There is seasonality in the company’s business with the second quarter generating the highest earnings.
Nutrien was formed when a merger between Agrium Inc. and Potash Corporation of Saskatchewan Inc. was completed in Jan. 2018.
The stock is dual-listed, trading on the Toronto Stock Exchange as well as the New York Stock Exchange under the same ticker, NTR.
Industry fundamentals
At BMO’s Farm to Market Conference in May, president and chief executive officer Mayo Schmidt commented on positive agriculture fundamentals, “As we see crop prices that are at 10-year highs and a tight supply/demand balance for grains and oilseeds, farmers around the world, in our experience, are looking to maximize yields, which is supporting global demand and prices for fertilizers and other crop inputs...The global supply and demand balance for grains and oilseeds is tight, driven on the demand side by rebuilding of the Chinese hog population as well as higher quality feed for the herd, which we believe will create sustainable new demand for grains and oilseeds. Now, even with the increased acreage and yields of key crops globally, we still expect tight stocks–to-use ratios and strong prices in the next year and beyond.”
Investment thesis
- Industry leader. Nutrien is the largest potash producer in the world and the third-largest nitrogen producer globally.
- High barriers to entry.
- Earnings momentum. Management estimates that a US$25 per metric tonne increase in fertilizer prices lifts its annual adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) by US$650-million.
- Positive tailwinds with supportive agricultural conditions. Rising crop prices (e.g. corn, soybean and wheat prices) given low stocks-to-use ratios (demand rising faster compared to supply). With higher crop prices, farmers are applying more fertilizer in order to maximize their yields/harvests (higher return on investment), resulting in higher fertilizer prices and sales volumes.
- Healthy balance sheet. Providing the company with the financial flexibility to fund organic and acquisition growth. As at Dec. 31, the adjusted net debt-to-adjusted EBITDA ratio stood at 2.6 times.
- Solid free cash flow generation.
- Committed to returning capital to investors through dividends and share buybacks.
- A potential wild card: A proposed partnership with BHP in the future development of BHP’s Jansen potash project located in Saskatchewan. With a new CEO at the helm of Nutrien, new leadership may help facilitate a potential partnership arrangement. In April, Mr. Schmidt became the company’s new president and CEO. A decision on the Jansen project by BHP could be announced in a couple of months.
Quarterly earnings results
After the market closed on May 3, the company reported first-quarter financial results that were better-than-expected and sent the stock spiking by over 4 per cent the following trading day on high volume.
Adjusted EBITDA came in at US$806-million, surpassing the consensus estimate of US$665-million. Adjusted earnings per share was 29 US cents, well above the Street’s forecast of 8 US cents per share.
Also positive, management raised its earnings targets for 2021, expecting adjusted EBITDA to come in at between US$4.4-billion and US$4.9-billion, up from its previous guidance of between US$4-billion and US$4.5-billion. Adjusted earnings per share is anticipated to be between US$2.55 and US$3.25, up from prior guidance of between US$2.05 and US$2.75.
The company has tentatively scheduled the release of its second-quarter financial results for Aug. 9, after the market closes. Currently, the consensus EBITDA and earnings per share estimates are US$2.06-billion and US$1.89, respectively.
Returning capital to shareholders
The company pays its shareholders a quarterly dividend of 46 US cents per share, or US$1.84 per share on a yearly basis, equating to a current annualized yield of 2.9 per cent.
In Feb., the company announced a 2-per-cent dividend hike, lifting its quarterly dividend to its current level of 46 US cents per share from 45 US cents per share.
Between Feb. 27, 2020 and Feb. 26, 2021, the company repurchased 710,100 shares as part of its share buyback program.
Analysts’ recommendations
According to Bloomberg, 17 analysts have issued research reports on the company after Nutrien released its first-quarter financial results, of which 14 analysts have buy recommendations and three analysts have neutral recommendations.
The firms providing recent research coverage on the company are: Accountability Research, Barclays, Berenberg, BMO Nesbitt Burns, CIBC World Markets, DZ Bank AG, Exane BNP Paribas, HSBC, J.P. Morgan, Morgan Stanley, Morningstar, Raymond James, RBC Dominion Securities, Scotia Capital, Stephens, Stifel, and TD Securities.
Revised recommendations
Last week, Adam Samuelson, an analyst at Goldman Sachs, tweaked his target price, lifting it to US$70 from US$69.
In May, multiple analysts revised their expectations – all higher. Those changes included:
- BMO’s Joel Jackson bumped his target price to US$65 from US$62.
- CIBC’s Jacob Bout increased his target price to US$66 from US$65.
- Morgan Stanley’s Vincent Andrews raised to US$62 from US$56.
- Raymond James’ Steve Hansen to US$75 from US$65.
- ·RBC’s Andrew Wong to US$63 from US$62.
- Scotia’s Ben Isaacson to US$65 from US$63.
- Stifel’s Vincent Anderson to US$74 from US$64.
Financial forecasts
The Street is forecasting EBITDA to come in at US$4.85-billion in 2021, up from US$3.7-billion reported in 2020, and US$4.97-billion in 2022. The consensus earnings per share estimates are US$3.14 in 2021, up from US$1.80 reported in 2020, and US$3.30 in 2022.
Earnings forecasts have increased sharply over the past few months. For instance, four months ago, the Street was expecting EBITDA of US$4.18-billion in 2021 and US$4.44-billion in 2022. The consensus earnings per share estimates were US$2.32 in 2021 and US$2.76 in 2022.
Valuation
According to Bloomberg, the stock is trading an enterprise value-to-EBITDA multiple of 9.6 times the 2022 consensus estimate, above its three-year historical average multiple of 8.6 times. In comparison, industry peer Mosaic Company (MOS–N) is trading at an EV/EBITDA multiple of 7.3 times the 2022 consensus estimate, according to Bloomberg. CF Industries Holdings Inc. (CF-N), another industry player, is trading at an EV/EBITDA multiple of 9.6 times the 2022 consensus estimate, according to Refinitiv.
The average one-year target price is US$66.74, implying the share price is nearly fully valued. Target prices are quite concentrated, ranging from a low of US$62 (from Morgan Stanley’s Vincent Andrews) to a high of US$75 (from Raymond James’ Steve Hansen).
Insider transaction activity
Quarter-to-date, there has not been any trading activity reported by insiders.
Chart watch
On June 4, the stock price jumped 3 per cent on high volume with over 4.1 million shares traded on the New York Stock Exchange, well above the three-month historical daily average trading volume of approximately 2 million shares. The stock closed at a record high.
Year-to-date, the share price has rallied 27 per cent, outperforming the S&P/TSX composite index, which is up 15 per cent. In addition, the stock has outperformed the S&P/TSX materials index, which has gained 6 per cent.
The share price broke above a major resistance level of $75. In terms of key technical resistance and support levels, the share price is approaching a ceiling of resistance around $80. A break above $80, could lift the share price to around $90. Looking at the downside, there is initial technical support around $70, near its 50-day moving average at $71.14.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
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