2019 was a difficult year for crops in the U.S. especially, due to extremely wet weather and the trade war between China and the USA.
The trade agreement between the U.S. and China requires China to purchase $36.5 billion in U.S. agricultural goods in 2020 and $43.5 billion in 2021. And the poor growing season in 2019 helped reduce the stocks available for supply.
In my own experience (over 30 years managing institutional portfolios) I have found the time to invest in fertilizer stocks is just before the spring, since they tend to rise during the summer months (a typical seasonal pattern).
Source: Data from Nutrien 2019 Annual Report
Nutrien produces and distributes over 27 million tonnes of potash, nitrogen and phosphate products for agricultural, industrial and feed customers worldwide. They also own a leading agriculture retail network with accounts around the world.
| Company 2020 Guidance | 2019 | 2020 High | 2020 Low |
| Earnings Per Share | $1.70 | $2.60 | $1.90 |
| Potash EBITDA ($millions) | 1,593 | 1,500 | 1,300 |
| Nitrogen EBITDA ($millions) | 1,239 | 1,400 | 1,200 |
| Phosphate ($millions) | 194 | 180 | 250 |
| Retail ($millions) | 1,231 | 1,500 | 1,400 |
Source: Data from 2019 Nutrien Annual Report
The dividend (45 cents a share) yield is a generous 5.5%. (Source: MarketWatch.com). The company also has plenty of free cash flow to pay for capex and dividends and share buybacks.
Nutrien generated $2.2 billion in free cash flow in 2019, up 9 percent over last year, and $2.6 billion in free cash flow including changes in non-cash working capital in 2019, which is over three times higher than in 2018.
Source: 2019 4th Quarter Earnings Report
Due to the change in identity post-merger, Nutrien is not as understood by many U.S. investors. One distinct advantage enjoyed by the company is access to extremely inexpensive natural gas in Canada – the ingredient to nitrogen fertilizer production (12% of sales but 29% of EBITDA). Another is huge deposits of the key fertilizer Potash in Saskatchewan, Canada.
Canada has the second-largest level of potash reserves in the world, and is the leader in terms of global production. The latter half of 2019 saw the U.S. lose 17 million acres of seeded cropland due to excessive wet weather. As mentioned above, more normal weather during 2020 should see a rebound in fertilizer demand and better pricing.
Data by YChartsOther considerations:
- Significant costs in much lower Canadian dollar of late; sales in U.S. dollars.
- More than one producer of potash cut back production last year.
- Nutrien’s global retail network dampens sensitivity to commodity price swings (2000 retail outlets around the world).
Based on the midpoint of company guidance (which may prove conservative) the forward P/E is more like 12X earnings (and only 3.6X EBITDA based on 573 million shares O/S). A target valuation of 15X the high end of their guidance (which is more likely given a return of much of the U.S. acreage that will require fertilization, with higher exports expected to China) would imply a $39 target price, or a return of at least 18% from recent levels of around $33.
The stock price has fallen in sympathy with the overall market, presenting a unique buying opportunity prior to seasonal strength ahead of the planting season.
