Nutrien profits: as if there were no fertilizer crisis

Michael Wiggins De Oliveira profile picture

Leonid Sorokin

investment thesis

nutrients (New York Stock Exchange:NTR) The fourth quarter guidance caught investors by surprise, as the area where Nutrien struggled to live up to expectations was exactly the area where investors wanted a positive surprise. That is, Nutrien’s potash opportunity.

Additionally, with high energy costs negatively affecting Nutrien, investors had expected to see Nutrien reaffirming its full-year 2022 EPS guidance of approximately $17 per share, at the midpoint. But here too, investors were disappointed.

For investors who didn’t fully believe that fertilizer supply is extremely tight around the world, this quarter’s guidance was all the information they needed to get out of this name last week.

But for investors who understand the push and pull of this story, while this guide was clearly frustrating, all that has happened is that the bull case was delayed, rather than destroyed.

What is happening right now?

Nutrien revised down its outlook for the full year. We will discuss this in more detail in a moment. But first, I think it’s important not to lose sight of the underlying opportunity.

The bear case here is that farmers are lobbying against high potash prices. In fact, for anyone closely following this space, this possibility had already started to gain ground over the summer.

NTR Q3 2022

NTR Q3 2022

What you can see above is that in early 2022, the price of potash went higher. Farmers therefore did not want to pay higher prices, so they postponed their fertilizer purchases.

This has now led to inventory levels becoming tight. And if one were to look at Nutrien’s stock price, it’s almost as if the entire bullish argument has collapsed:

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Data by YGraphics

What you see above is that despite everything we know, plus all the favorable macro conditions one might have expected, Nutrien’s share price is actually lower than it was in early 2022! That is simply absurd.

Let me explain why the history of potash is not dead. Farmers will simply delay purchases of their fertilizer or potash products.

We don’t even need to overcomplicate the investment case by highlighting that crop yields are significantly higher than they have been for a while.

NTR Q3 2022

NTR Q3 2022

In simple terms, if crop prices are high, farmers are incentivized to invest in fertilizer and seed to continue farming. And as you can see above, across the board from corn to soybeans, crop prices are expected to remain elevated through 2023.

Guidance for the fourth quarter is revised downwards

As we headed into third quarter earnings, investors were expecting fourth quarter earnings per share to be about $4 per share. That would mean that by 2022 Nutrien was going to print about $17 EPS, and the stock price was 5x EPS and everyone was happy.

But now, after Nutrien revised down its fourth-quarter EPS to about $2.80, investors are now suddenly reminded of why investors shy away from investing in fertilizer companies.

It is not just the poor visibility that plays a problem in terms of volatility. But also, it is Nutrien’s high operating leverage. When things go well, revenue grows a bit and the EPS line jumps a lot.

And vice versa. When the top line slows down and inflationary costs continue to rise, there is a chance that the EPS growth rate will compress rapidly.

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The bottom line

Investors are baffled. Are we at the peak of profits for fertilizer companies? Or what is happening? I explain that although investor expectations were ahead of fundamentals, there is every reason to believe that this is not about maximum earnings.

I think 2023 will be as strong as 2022. And if we think about Nutrien being priced at 5x this year’s EPS, here’s what this multiple means in practical terms.

Investors are asked to pay 5 years of earnings in advance. And if in 2023 Nutrien’s EPS matches 2022, that means investors will only need 3 or 4 highly profitable years, before Nutrien is basically available for free.

But between now and then, investors will have to be patient and wait for investors to get positively excited about the prospects for Nutrien’s potash.

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