Nutrien: A Low-Risk Total Return Pick Benefiting From Inflation (NYSE:NTR)

Nutrien Ltd. (NYSE:NTR) is one of the largest and most diversified farm fertilizer manufactures in the world. The good news for investors is share pricing is back to 2018 levels (when its merger was completed and public trading began, before the pandemic), despite a much-improved balance sheet after years of strong operating profitability. In essence, the company is better positioned for the future than six years ago, both from a financial backstop and steady-growth viewpoint. Not going unnoticed, a solid 4% dividend yield is available, which should expand faster than the average S&P 500 company. Why will dividend payouts rise? Because the business serves as a great food inflation hedge in an almost certain stagflation environment after 2024 (my view).

As long as the farm economy remains resilient and grain prices rise from early 2024, Nutrien buyers at $53 today could be locking in a terrific total return pick over the next 3-5 years. For the risk-conscious investment crowd, I am projecting annualized gains, including dividends, of +15% to +20% from this large-cap leading agriculture supplier over the coming 5-year period. In addition, the potential for outsized gains is possible if grain prices spike this year or next.

The Bullish Case for Ag Commodities

Nutrien may be set for an unexpected price rebound the rest of 2024, after declining on a regular basis for two years. The reason is commodity inflation could be preparing to return with a vengeance, helping to raise crop pricing and farmer income. And, when farmers become financial winners, they tend to spend considerably more capital on fertilizers. Nutrien is one of the largest nitrogen, potash, and phosphate makers/retailers in the world. Manufacturing items mainly in North and South America, this business stands to be one important beneficiary when we connect the dots on what could be developing.

Conventional wisdom wrongly believes inflation has been licked. My view is the Federal Reserve appears to have lost its way on the inflation battle. In 2022, Chairman Powell promised he would not end the inflation fight until rates were back under 2%. Only then would the world’s primary central bank normalize short-term interest rates. He even explained a recession might be necessary to get the inflation genie back in its bottle. Fast forward to May 2024, and the Fed appears to have lost its nerve. Now, a change in policy appears to be taking place, that may actually launch cost-of-living increases in the wrong direction. I fear it’s all tied to the “need” for inflation to soft default on America’s $35 trillion sovereign debt problem, getting worse every day.

Why do I say such blasphemy? At last Wednesday’s Fed meeting (May 1st), Chairman Powell all but promised short-term banking rates won’t rise this year, telegraphing the next policy move will be to lower them (a policy goalpost move from 2022), even if inflation remains stubbornly above 2%. My fear is a decision to prevent recession later in the year may prove premature for policy easing, actually causing even more long-term damage to the economy. In terms of political forces at play, an overly easy Fed going into the November election might actually spike inflation back towards 5% by the end of 2024.

Commodities, especially oil and gold, have been perking up for months. Grains may be bottoming as I write this article, while cocoa, sugar, coffee and other agricultural items continue to build on 2023 gains. If central bankers are not careful, a slide in dollar exchange rate confidence by foreign investors unsure of Fed policy goals could drive commodity prices (and imported goods priced in dollars) higher at materially faster rates. Powell’s insistence on a falling bank rate future was not taken well in the foreign exchange market this week, as confidence in the inflation fighting zeal of 2022 fades from memory.

Please don’t blow off my cautionary view of inflation as impossible. A few months ago, Goldman Sachs analysts put out a prediction of 15% commodity inflation for 2024 if the Fed follows through on rate cuts to support the economy. In a March 24th note to clients, Samantha Dart and Daan Struyven explained,

We find that US rate cuts in non-recessionary environments lead to higher commodity prices, with the biggest boost to metals (copper and gold in particular), followed by crude oil. Importantly, the positive impact on prices tends to increase with time, as the growth impulse from looser financial conditions filters through.

Nitrogen, potash, and phosphate fertilizer prices each peaked in 2022 on the fear Russia’s invasion of Ukraine would hurt supplies globally. Today, prices are far above their 2020 pandemic bottoms, but remain lower than 2008 spike highs.

In the end, a rebound in grain prices this year could help support fertilizer prices and Nutrien operations. I suggest watching not only spot potash/phosphate/nitrogen fertilizer prices, but corn, soybeans, and wheat for clues about the stock’s immediate price future. All three rallied smartly after the Fed said policy rates were not going any higher this year.

Cheap Nutrien Valuation

Financial ratio analysis highlights Nutrien as a clear undervaluation candidate. On price to trailing earnings (13.9x), sales (0.9x), cash flow (5.2x), and tangible book value (2.4x), the stock is sitting just above the 2020 pandemic panic lows. I figure the four valuation ratios are averaging a 35% discount to trading norms measured from 2018’s merger.

Follow my logic. Given a super-strong 9% free cash flow yield still exists, years after the fertilizer industry cycle peak, what’s the bullish angle when business improves? The truth is Wall Street analysts are not expecting much from Nutrien, after several years of declining fortunes. So, if any upturn in sales and income is next, the stock quote will have no choice but to rise in step.

Further evidence of an inexpensive buy, enterprise valuations (equity + debt – cash on the balance sheet) on EBITDA (7x) and Revenues (1.3x) are even lower relative to past trading history. These two indicators of value are sitting at rough 50% discounts to ratio averages since 2018.

The head-scratcher for me is the company’s balance sheet has markedly improved since 2018-19, while the stock price has not. 19% of shares outstanding have been repurchased over this span, leveraging asset worth per share. With current assets growing by almost $4 billion and net property & equipment rising $3 billion (vs. a minor $1 billion increase in net debt), you would have guessed NTR is trading at a quote substantially higher than six years ago. Nope. Tangible book value has even risen from $17 to $22 per share, without helping the stock quote much. My point is the underlying asset value of the business has been jumping at a pace faster than stock gains, creating a superior long-term buy setup today vs. 2018-19.

Final Thoughts

To be honest, the 12-month technical chart price pattern for Nutrien has largely mimicked changes in grain markets. You can compare this chart with the corn, soybean, and wheat patterns drawn earlier in the article. While momentum trends have not turned higher yet, a period of consolidation and better supply/demand balance has been the experience since January.

Current Wall Street estimates are calling for weak grain prices, alongside little growth from Nutrien businesses over the next few years. Outside of a major recession pulling demand for basic food stuffs, I believe the below projections are a conservative baseline idea. I am expecting earnings beats to begin in the second half of the year, supported by rising grain prices around the globe (my projection).

If forward P/Es for 2025-26 are actually below a 10x multiple using a rising grain environment (vs. 13-14x trailing and 12x Wall Street estimates), with free cash flow yields of 10% or 11% approaching (vs. 8-9% currently), it will be very difficult for the Nutrien quote to fall substantially below today’s $53. Who wouldn’t want to own an industry-leading blue chip selling for a P/E under 10x, compared to the macroeconomic 25x earnings valuation for the S&P 500 in place today?

For downside risk, a major drop in grain commodity prices would be bad news for shareholders. Nutrien would likely suffer from declining demand and pricing for fertilizers. However, the valuation is so low, and financials for the business far stronger than before the pandemic, modeling a sustainable price drop under $40 is difficult. Absent a severe recession shock or a sizable drop in grains, we would need a stock market crash generally on Wall Street to pull price beneath that level, in my view. So, downside may be limited to -20% to -25% for “potential” total return loss over the next 12 months.

On the upside, arguments for a retest of the $117 all-time high price make sense if grain shortages appear (perhaps on climate changes creating droughts on the planet) or the U.S. dollar’s value plummets over the next few years (a function of foreign investors giving up on the Fed’s soft-default plans to cover $35 trillion in unpayable Treasury debt). Best-case scenarios for Nutrien’s stock include the possibility of quotes above the century mark in 18-24 months, good for a double on your investment today (+100% total return, including dividends, +50%ish annualized over less than two years).

Pulling all the ideas together, I rate Nutrien a Buy. From my 37 years of trading experience and real-time market research, I believe the likely rewards on investment far outweigh the risks to your capital. All other variables remaining the same, I peg Strong Buy territory under $45 a share, for this cyclical farm-economy pick.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.