It seemed last year that fertilizer giant Nutrien (TSX:NTR) has bright prospects amid rising geopolitical tensions. Economic sanctions on Belarus and Russia made fertilizer supplies tight, which ultimately led to a focus on Nutrien. However, the stock has been on a significant downtrend and has lost 35% since last year.
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What’s next for Nutrien stock?
While demand and supply remain in favour of Nutrien, the company has seen margin contraction in the last three quarters. There has been a decline in operating margin from 35% in the second quarter (Q2) of 2022 to 24% in Q4 2022. Plus, there has been some price moderation in key fertilizers in the last few months, which has also weighed on NTR stock. However, it looks well placed on a valuation front and could see a recovery later this year.
Nutrien is a $49 billion vertically integrated fertilizer manufacturing company. It produces nitrogen, potash, and phosphate, along with operations in retail in seven countries. Among peers, it has a competitive advantage of scale along with some of the lowest-cost production due to its integrated operations.
In 2022, the company reported free cash flows of $5.7 billion, marking a handsome 185% increase compared to 2021. Its higher production amid the strong price environment played out well last year.
Growth drivers and prospects
Nutrien reiterated in its recent release that demand, particularly in the potash segment, is outpacing supply. The situation is expected to persist in the long term, which will be beneficial for a low-cost producer Nutrien.
As a result, the company forecasts to reach an operational potash capacity of 18 million metric tonnes by 2026. Potash shipments from Russia and Belarus, the second- and third-largest global suppliers, are expected to fall 25% and 50% this year, respectively. So, the supply constraints will likely lead to higher prices, benefitting companies like Nutrien.
Even if there is a softer demand outlook in the short to medium term due to recession fears, Nutrien is confident of higher market demand in the long term.
Nutrien has given an adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) guidance of $9.5 billion for 2023 — that’s a 20% decline compared to 2022.
Focus on shareholder returns
Since the beginning of 2022, Nutrien has bought back 61 million shares of the total outstanding, representing 10% of the float. It has also raised quarterly shareholder payouts by 10% this year. For 2023, the company will now pay a total dividend of $2.12 per share, implying a yield of nearly 3%.
The management’s focus on both buybacks and dividends indicates the company’s solid balance sheet strength and earnings stability. The buybacks will likely boost its per-share earnings and make existing shareholders’ stake more valuable.
On a valuation front, NTR stock is currently trading 10 times its 2023 earnings and looks relatively fairly priced. That’s close to the industry average as well.
Bottom line
Fundamentally, Nutrien seems like a decent bet. Tightly supplied markets will likely be a big growth driver for the company for the next few years. Its solid balance sheet and earnings visibility could drive shareholder value in the long term. But at the same time, investors should also consider its correlation with fertilizer prices. The element of cyclicality makes it a risky bet.
