Nutrien: Q1 Earnings, Sizzling Outlook, 5.4% Yield

Summary

• Nutrien increases its 2022 EBITDA guidance by 47%.
• The stock offers a 5.4% yield via repurchases and dividends. A yield that's both sustainable and attractive.
• Nutrien is priced at approximately 3x EBITDA (adjusted for FX).
• As always, happy to discuss more in the comments section.
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MaRRitch/iStock via Getty Images

Investment Thesis

Nutrien (NYSE:NTR) reports Q1 2022 that were exactly as expected, awesome. Not only has Nutrien raised its 2022 EBITDA guidance by 47%, but it has been aggressive in returning capital to shareholders.

For 2022 as a whole, Nutrien is intent on repurchasing shares and paying out a dividend that offers shareholders an approximate 5.4% yield.

I argue that paying 3x this year's EBITDA is a very compelling investment. Note, that this multiple adjusts for FX.

Revenue Growth Rates Will Remain Strong

Nutrien's revenue growth rates

Last month I wrote an article titled, Nutrien Stock Is Likely Going To Blow Past Analysts' Estimates.

At the time, we didn't really know how things would unfold. Now, over the past month, we have so much more visibility.

Not only do we know that Nutrien's prospects are going to remain strong during 2022, but more and more evidence leads us to believe that 2023 is going to be notably strong too.

And what's the most important consideration? Nutrien has raised its 2022 adjusted EBITDA guidance by 47% since Q4 2021 earnings were announced. And how much has the stock moved since all this happened?

Author's coverage of NTR

Depending on how the stock opens we are talking about single-digit returns on a stock that has incredibly strong prospects! Basically, not to toot my own horn, but I laid out the bull case over a month ago. Yet, Nutrien's stock has frustratingly barely moved. Can you imagine this?

Why Nutrien? Why Now?

The longer I invest, the more impatient I become. Yet, after listening to the Berkshire Hathaway (BRK.B)(BRK.A) meeting, I'm reminded so clearly of the importance of thinking long-term.

For me, this comes at a particularly important time, when Berkshire is once again trouncing the S&P 500 (SPY) over the past five years. And they said that Warren Buffett had lost his touch and that a newer manager with an eye for disruptive technologies should be our new mentor... Bless us Father for we have sinned.

Moving on, this is the thesis we need to accept. Russia and Belarus together export more than 40% of the global potash supply. With Russian sanctions, this has essentially been cut from the market. This has left fertilizer companies scrambling to produce more fertilizer to benefit from higher fertilizer prices.

But this is the problem. European peers have to manufacture fertilizer with crippling energy prices. This becomes uneconomical for them to ramp up production.

And the last piece of the puzzle, food prices broadly are rapidly rising. I'm not only referring to wheat, corn, and soybeans. I'm talking about everything. Altogether this leads to massive demand from farmers, eager to get hold of fertilizer to maximize crop yields.

So you have really high demand, together with low inventory.

Mosaic Q1 2022 presentation

I've taken the graphic above from Mosaic, but the same applies to Nutrien.

What we have is North American companies very well positioned from both lower energy costs and higher potash and phosphate prices, in a time when channel inventory is incredibly low.

With all this working together in Nutrien's favor.

Now, Nutrien has raised its EBITDA guidance by more than 45% at the high end of its guidance. Obviously, Nutrien was always planning to, at some point in 2022, raise its EBITDA guidance.

But I'm reasonably confident that Nutrien didn't expect that within 60 days of reporting their Q4 2021 results, they would raise their guidance as aggressively as they have. Even if we account for some lowballing of estimates.

Capital Returns to Shareholders

Nutrien has returned to shareholders $740 million via share repurchases during the first four months of this year.

However, keep in mind, that the results that we are seeing from Nutrien are nearly all a reflection of what would have happened despite the Russian invasion of Ukraine. Because these events only started to materialize towards the end of the quarter.

This implies that Nutrien is now in a position to meaningfully increase its capital return program.

Consequently, Nutrien has signaled its intention to return to shareholders $2 billion. If we adjust its market cap to Canadian dollars, this equals an approximate 3.6% return via share repurchases.

Further, investors also get approximately a 1.8% yield from dividends. Altogether shareholders will get approximately 5.4% total yield via repurchases and dividends.

NTR Stock Valuation -- Still Very Cheap

The most bearish consideration any investor can bring to the argument is that Nutrien has seen its share price increase substantially in the past three months, therefore it must be fully priced.

To that, I remark that the stock is now priced at approximately 3x this year's adjusted EBITDA (FX adjusted).

And to that argument bears note that this must be the going ''multiple'' for this fertilizer, I push back to my discussion earlier. In the past 60 days alone, Nutrien has raised its EBITDA by 47%.

As it stands right now, the stock hasn't moved up by 50%, then surely the stock is not fully pricing in the new outlook for the company.

The Bottom Line

We are now in a very interesting part of the cycle. We are on the cusp of seeing just how strongly Nutrien and other fertilizer companies are going to benefit from higher potash and phosphate prices.

And the only thing that bears can say is that the stock has rallied so meaningfully that it must therefore be overdue for a pull back.

My best advice is don't look back to a company's share price to be indicative of where the share price is headed. As long as you are only paying around low single digits to EBITDA and collecting around 5.4% yield from repurchases and dividends, you can afford to take a position and stick around for the ride.

To preempt your question, I don't own stock here. I own stock in Intrepid Potash (IPI). Since I believe that Intrepid is even more compelling than Nutrien. That doesn't mean I'm right. But that's where my own capital is headed. Whatever you decide, good luck and happy investing.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Michael is long IPI.

Comments

[mirekw]

"The stock offers a 5.4% yield via repurchases and dividends" - what a nonsense
a yield is the dividend divided by stock price only PERIOD

[divJohn]

Long term NTR is overpriced. This pop in their EBIT and EPS is temporary and buying on an estimated forward 5 P/E is a recipe for losing a lot of money in my, admittedly amateur, opinion. The war will eventually end and sanctions will eventually be lifted (Russia is too big of a commodity producer to keep them in place long term).

Short term it might be a good trading play.

[abbaman32]

NTR is unfortunately in free fall, declining $2-$4 during each trading day. I doubt that it will return to its 52 week low but it looks like it still has plenty to go on the downside. The other AG nutrient stocks are behaving in about the same manner. I just hope that NTR will continue to scoop up shares at ever lower prices.

[abbaman32]

NTR is +5% but so are CF +5.23% and MOS +5.57%. Looks pretty programmed and manipulate to me.

[Fred. L.]

@abbaman32

Dude, you got to chill. These companies are highly correlated. You cant worry about the short term noise...unless you are a day trader.

[abbaman32]

@Fred. L. Having held my NTR position and its predecessor companies for the past 16 years, I believe I do not qualify as a day trader.

[Fred. L.]

@abbaman32

Then you should not worry about things that only day traders worry about.

[abbaman32]

Perhaps this might not be a losing week after all.

[abbaman32]

NTR down 5 of the last 6 weeks. Not good.

[A Pragmatic Investor]

@abbaman32 That's why I took some profits, and put them into $ICL. A lot less volatile and a decent dividend as well.
Good Luck !

[divJohn]

@abbaman32 I sold my entire position after the first pop above $100. Couldn't sit on a 50% appreciation in a month and a 3X on my original cost basis. Their windfall profits because of the war induced supply constraint won't last. I think the market is starting to realize that.

Someday I hope to get back in at a reasonable price.

[abbaman32]

NTR has roughly 551 million shares outstanding less whatever they have bought back. So given the enormous amount of free cash flow they are earning, why not issue a special dividend of a dollar or 2 per share. Buybacks are nice but they don’t put any money in the pockets of shareholders who want to keep their shares rather than sell them.

[Allstocksfail]

Todays over $10 a share haircut was a little unnerving

[abbaman32]

Have all the stop losses been taken out yet?

[abbaman32]

One only has to look at how the other AG nutrient stocks are doing to see that the attacks against all of them are coordinated.

[SKApotash]

I'm beginning to question if Nutrien will even hit 125 like forecasted.....given the market conditions

[abbaman32]

@SKApotash Sentiment may change after we hear what is in store for us on June 9th.

[abbaman32]

@SKApotash UBS says it will today.

[abbaman32]

One of the things the analysts were interested in during yesterday's CC was the extent to which sanctions have adversely affected Russia's ability to sell its potash. A peek at how things are going occurred yesterday when Nigeria, which has historically imported all 200,000 metric tonnes of potash annually from Uralkali, informed us that Russia was unable to deliver any potash to Nigeria as a result of which Nigeria bought what it needed on the spot market in Canada. Since financial sanctions hit Russia back in March, the price of potash hit a record $1,125 per tonne at the end of April for product on a delivered basis to South Africa. The potash purchased from Canada is expected to arrive in time for the planting season which starts at the end of May.

[autofocus111]

@abbaman32 "sanctions have adversely affected Russia's ability to sell its potash" I keep seeing posters state this. What are the specific sanctions imposed by the West on Russian fertilizers? My understanding is that Russia has decided to (temporarily) ban exports of its fertilizers. The only sanctions I'm aware of are those on Belorus.

[abbaman32]

@autofocus111 Here is an example that I am aware of. Uralkali was not sanctioned but Dmitry Mazepin was by the EU in March. So Mazepin left the Uralkali BOD and reduced his controlling stake in Uralchem which owns the majority of Uralkali. Another thing. Sanctions against Russia since the invasion of Ukraine have caused Western banks and traders to steer clear of Russian supplies of all types for fear of running afoul of the rapidly changing rules while shipping firms are avoiding the Black Sea region due to safety concerns. During yesterday's CC, we were told that potash shipments out of Russia have been reduced by 2-6 MMT. We were also told that Russia's invasion of Ukrainian could impact global fertilizer trading beyond 2022. So although there has not been an explicit sanctioning of potash fertilizer coming from Russia, the net effect of the items I have mentioned is tantamount to such an imposition.

[autofocus111]

@abbaman32 But the Russians could divert product Western nations choose not to purchase to countries like Brazil, Inda, China etc. that are not applying any sanctions (direct or indirect). Just like oil. Anyway, it's not clear to me to what degree Russia exports are actually down due to sanctions vs. the decision by Russia.

[MOTHNA]

Does anyone know whether the CP Railroad strike has been resolved? In March of this year, a strike was announced and some concerns were expressed regarding NTR's ability to get its product to market.

[436349]

@MOTHNA …. Over within a day or two if I recall.

www.bnnbloomberg.ca/...

[MOTHNA]

@436349 Thank you!

[abbaman32]

You only have to look at how the stock is trading now to see that many non-believers still remain out there.

[Michael Wiggins De Oliveira]

@abbaman32
'' non-believers still remain out there.''
^^Agreed.

[436349]

@Michael Wiggins De Oliveira Morning Mr. Wiggins De Oliveira… helpful article and particularly appreciated it’s timeliness wrt NTR’s earnings announcement.Thanks!

WRT your above point … curious what you believe are the Top 5 concerns (possibly prioritized) that contribute to making a “non-believer”.

i.e…. Commodity (fertilizer) cycle? 2007-2009 cycle and nightmare of buying at top / selling low? long period of disappointing returns when in cycle lull? Not an “in vogue”investment (i.e., like fang stocks)? NTR leadership question? Overly conservative management/strategies/execution? Dividend pay-out too low? stock buyback underwhelming? Earnings / earnings outlook? Sometimes notably underperforming competitors? Share price run-up must be near over risk? Cyclical nature promotes trading? Lack of self promotion? A Canadian company? Please add and prioritize and no rush. Would be appreciated to get your thoughts on this.

I am curious as a long time investor in NTR and it can be a love / disappointment relationship!?! And, maybe too close /attached which is always dangerous.

Yet, In this market, potentially going into stagflation and with lots of uncertainty…. I am feeling this is one of the best times to be in this sector and owning NTR stock. Time will tell as they say!?!

Thanks again and for your very informative articles. Appreciated!

[autofocus111]

@436349 For me at least it's these two: NTR leadership question? Overly conservative management/strategies/execution? The company is just running on autopilot until a new CEO is hired.

[zak3999]

OMG, really Michael?

"Nutrien is intent on repurchasing shares and paying out a dividend".
Repurchasing shares NOW, when the price is at all time high. How is that making sense?
The time for that was at the end of 2020, or first half of 2021. Instead, now they should pay a special one time dividend.

[abbaman32]

@zak3999 So far the shares they have repurchased this year were done with an average cost of $82 per share. Some might have thought that was already a bad idea. A number of analysts believe that NTR's shares are heading to the $120-$135 range. If that is the case, and shares get scooped up at current prices, would you say that was inopportune? By the way, I am with you on the dividend bump in any form.

[arok79]

NTR MOS already had huge runups author. As usual too late to the party. Big profits have already been made. Too rich currently.

[Fred. L.]

@arok79

I wouldn't say that...but we all know this is still a cyclical name. Just a question of what inning are we really in? Depending on the whole Ukraine situation...I'm not really sure any of us really know

[abbaman32]

@Fred. L. One possible answer is that we haven't gotten into the stadium yet because of the traffic.

[abbaman32]

@arok79 MOS up 9% today and NTR up 6.5%. Yeah, too late to the party as big profits have already been made. NOT.

[abbaman32]

We should not leave what Mosaic has to say out of the potash production equation. On its recent CC, MOS said that its own debottlenecking initiatives could ramp up fertilizer output [presumably potash] fairly quickly and any such initiative could increase potash production by about 1.5 MMT by the end of 2023 which is fine. But the salient takeaway from what they had to say is that they expect that it will take 2-4 years for the global potash deficit to catch up with demand. Which would mean that NTR would be in clover for years.

[secorewb]

I enjoy your ability to get multiple points across and with brevity. What range of PE ratios will Mr. Market bestow on these companies?

[Michael Wiggins De Oliveira]

@secorewb

''What range of PE ratios will Mr. Market bestow on these companies?''

This is a very good question. Thank you for asking it.

Truthly, I don't suspect we are going to get much multiple expansion here.

That being said, even without multiple expansion, even if the business just grows its EPS by 70% in 2022 and doesn't look too much in 2023, then, we are going to be really rewarded.

Personally, I would like to see multiple expansion, of course. But everyone is so fearful that everything goes back to pre-Russian sanctions.

Everyone is fearful that the fertilizer cycle we are now in is similar to that of 2006.

[A Pragmatic Investor]

@Michael Wiggins De Oliveira IMO there too many differences to equate to 2006. Russian supply is not coming back to the market for a long time. They permanently will lose some customers because of this war. We also have seen demand permanently increase from southeast Asia; because of rise in standards of living increases. have booked some profits on American companies. Riding $ICL for European exposure.

[user1102170119199187]

@A Pragmatic Investor How do you know the Russian supply is not coming back to the market for a long time? Do you have a crystal ball that we don't have telling you when the war will be over? I think it's better to say we don't know when the Russian supply will be back and it could be for a long time.

[abbaman32]

The word is that we will know more about what NTR plans to do with all the free cash flow they are generating on June 9th.

[436349]

@abbaman32 … my take too. Very “close to the vest” on many fronts. But, take-away is what a conservative “powerhouse” in the space.

If I heard correctly, Canpotex is anticipating a $50 ton realized price increase for potash in Q2.

Lots of discussion on what it will take to have NTR ramp up potash production to 18 mil from 15 mil. But again, conservative “monitoring closely” type answers and more updates on June 9.

Also, an interesting dyk from interim ceo.. apparently 70% of all new “I.e. additional potash (to market) in the last two years is directly from Nutrien. Not sure if in context of NA or global.

Be sure to listen to recorded earnings call.

GLTA!

[abbaman32]

@436349 This whole business of ramping up potash production if the need becomes overwhelming is quite interesting. Although we keep hearing about a potential increase from 15 MMT to 18 MMT from the 6 mines in Saskatchewan [viz., Allan,Cory,Lanigan,Patience Lake, Rocanville and Vanscoy], total operational capacity at these mines was only 13.15 MMT in 2020 but presumably is in the process of generating the necessary production to meet the announced 15 MMT potash goal for 2022. Management has pooh poohed restarting Piccadilly in New Brunswick so I guess it would have to come from the aforementioned 6 Saskatchewan mines that have a total 'nameplate' capacity of 20.624 MMT.

[abbaman32]

@436349 I just caught an interesting quote from Ken Seitz earlier that is worth repeating. After noting that NTR could further expand its production to 18 MMT without a major capital investment at its mines in Saskatchewan, larger investments would be needed to increase capacity from 18 MMT to 23 MMT. "We intend to grow our volumes but just not stop at 18 MMT. We intend to continue to grow with the market."

[presikakid]

Time for a special dividend. Also how about a new CEO? This board seems shaky at best. It might explain why they can’t figure out how to optimize this unexpected cash bounty.