Nutrien Ltd. NTR-T stood apart from most other stocks during the recent bout of volatility: While the broader market slumped, then rebounded, the Canadian fertilizer giant continued to slide this week, touching a fresh three-and-a-half-year low on Thursday.
For investors who prefer out-of-favour stocks, though, this one is worth a closer look.
The share price has fallen more than 50 per cent from its high in 2022, suggesting a steep discount from its recent heyday, even though the company is still generating huge amounts of cash. The dividend yield has risen to 4.6 per cent, offering a strong incentive to buy the stock at the current lows and await a rebound.
Perhaps the stock’s most attractive feature: Sentiment is clearly in the dumps, as analysts slash their expectations, fertilizer prices subside and the company gains little public attention despite its $32-billion size – suggesting that the stock may be nearing a low point.
To be sure, Nutrien is struggling.
Its second-quarter financial results, released on Wednesday, reinforced a downward trend. Revenue tumbled 13 per cent, year-over-year. Margins contracted 8 per cent. Net earnings fell 13 per cent. Setbacks within the company’s Brazilian retail operations, where 21 stores were closed during the three-month period, led to a US$335-million impairment charge.
Over a six-month period, things looked even worse by most measures. Net earnings, for example, fell 46 per cent from the same period last year, because of lower fertilizer prices and a loss on foreign-currency derivatives.
Nutrien’s biggest challenges stem from a difficult environment that has also ensnared competitors. The share price of U.S.-based Mosaic Co. has fallen 35 per cent over the past year, trailing Nutrien by about five percentage points.
The chief culprit: Low corn and soybean prices, which have drifted toward four-year lows this year, have hit farmer incomes and dissuaded many from expanding their crops. These conditions have eroded U.S. demand for crop nutrients and contributed to weak fertilizer prices globally.
The price of potash surged above US$1,200 a tonne in 2022, after Russia invaded Ukraine and upset export markets. Since then, prices – determined by negotiated contracts with countries, often taking months to conclude – have settled below US$300, even as production costs have risen.
For Nutrien, this hurts, given its exposure to the commodity. In the first half of this year, potash contributed US$1-billion in adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization, or nearly a third of the company’s total.
The good news, and one of the main points supporting the bullish case for Nutrien, is that current fertilizer prices may mark the lows, according to analysts.
That’s because Canpotex, the marketing arm for Nutrien and Mosaic, recently struck an agreement with China and India that priced potash at US$283 a tonne. That was slightly higher than two previous agreements struck with rival suppliers, and may influence other negotiations elsewhere.
“With the offshore contracts now in place, we do expect a global price floor to be established, and standard demand remains strong through the second half of the year,” Mark Thompson, Nutrien’s chief commercial officer – and newly appointed chief financial officer, effective Aug. 26 – said during a call with analysts.
What’s more, Nutrien’s executives rattled off a list of improving conditions: Margins at its retail operations are expanding and operating-cost increases are moderating. Fertilizer sales volumes are rising, underpinned by better global demand.
The company expects potash sales volume in a range between 13.2 million and 13.8 million tonnes in 2024, or slightly higher than a low of 13 million tonnes in its previous guidance issued in May.
“What we see is agronomic need to replenish potash levels globally after a few years of underapplication in key markets,” Mr. Thompson said.
Lastly, Nutrien’s beaten-up share price offers a relatively low-risk bet on the stock. While the highs of 2022 may look like an aberration thanks to a brief period when fertilizer prices attracted more attention than gold, the share price is now lower than it was five years ago, before the start of the COVID-19 pandemic.
The stock trades at just 6.4-times enterprise value to EBITDA, a common valuation metric favoured by analysts. That’s considerably cheaper than the historical average of eight-times EV/EBITDA, according to Jacob Bout, an analyst at CIBC Capital Markets.
The dividend yield, at 4.6 per cent, is about a full percentage point higher than it was in 2019, which adds to the allure of the stock as bond yields subside and investors await a turn in the fertilizer market.