Nutrien: Waiting For Market Fundamentals To Improve (NYSE:NTR)

For Nutiren Ltd. (NYSE:NTR) the last 12 months have meant a lot of volatility and uncertainty as the market is fighting to handle the ongoing climate and weather-related issues it’s experiencing. High heat and unpredictable weather conditions are putting a toll on the agricultural sector and maintaining efficient inventory levels becomes difficult. For NTR this has meant a significant revision to the guidance for 2023. The EBITDA is expected to be nearly 15% lower than previously anticipated in May of this year. The deteriorating pricing environment is the root of these changes for the company. I am hesitant to start a position in the company until there are markable improvements in the way prices are. With a hold rating, you might be a little late to the party here, but you are significantly limiting your risk-taking, and that is worth it right now. Looking at other options like Corteva (CTVA) and The Mosaic Company (MOS) seems better in my opinion for those seeking exposure to the fertilizer industry.

Operational Overview

NTR holds a prominent position in the global agricultural landscape. This Canadian fertilizer producer ranks among the world’s largest manufacturers of critical agricultural components such as potash, nitrogen, and phosphate-based products, all of which are indispensable for crop cultivation. NTR’s footprint extends across the entire agricultural supply chain, encompassing activities from mining and production to distribution and retail. This integrated approach positions the company to deliver essential agricultural inputs and services to farmers worldwide, playing a crucial role in the food production ecosystem.

The last report from NTR showcased a significant decline in the guidance for 2023. This is largely affected by lower favorable prices for a large amount of the markets that NTR engages in right now. Potash saw an incredible rise in 2022 but has since come down to much more reasonable levels as of now. The same goes for both nitrogen and phosphate the company engages and sells as well. On the higher end of the guidance, NTR is set to have an EBITDA of $6.7 billion, down from the previous guidance of $8 billion. Such a shift has had a clear negative impact on the share price and it is continuing its downward trend from the highs of $113 in early 2022.

The growth cycle of commodities like potash and other fertilizer-related products often goes in cycles as companies aim to build up inventory levels when prices are low and that in turn increases them eventually as demand builds up. The forecast is that it will continue and rise for the coming couple of years and post new highs in 2024 potentially or otherwise in 2025. Estimates for NTR are quite poor though as the company is not necessarily expected to post any significant increase in the bottom line during those years, not even double-digit growth. I think this lack of growth is subduing the buy case and justifying a hold much better right now.

Technicals

Over the last 12 months, the share price of NTR has been in a stayed decline, posting a depreciation of over 20%. Looking at the red line which is the moving average it seems that the share price was rejected a couple of weeks ago which tells me that there may be further downside from here. Earlier this year it also got rejected, more precisely the middle of April. This seems to have sent the share price down further. It wasn’t until mid-July that the company managed to break the trend and go above the red line. This was shortlived though as it has returned below it now.

It has also not made a significant crossover on the MACD either which isn’t making the chart any more bullish right now. My view on the technicals for NTR is that the short-term is quite bearish as future pricing conditions for potash among others are deteriorating and could sour investor sentiment around NTR. This will likely result in the share price falling further. Buying now makes therefore little sense and holding a more neutral stance I find most favorable.

Assessing The Value

I have been quite bearish on NTR but I do find the long-term outlook to still be sound and offer a lot of potential and value. Investing and having exposure to the fertilizer market is a good bet. Securing strong food supplies will be a key priority for a lot of governments around the world. NTR offers a product that can help heavily with that so fundamental market demand will still be there I think.

Compared to historical levels NTR looks quite cheap right now but I do think you have to take it with a grain of salt. The forecast EPS for NTR is significantly lower than it was in 2022 and will result in a richer valuation. I think it’s better to hold or buy shares as the discount is only really 15%. If it reaches levels of around 30% then I think the downside is limited enough that adding or starting a position could be favourable. That is of course dependent on better prices for both potash and phosphate. Until there are remarkable improvements there I won’t be rating NTR a buy.

Risks

The fertilizer production industry faces a multitude of formidable challenges, with the enduring volatility of essential raw material prices, such as natural gas and phosphate rock, taking center stage. These fundamental inputs serve as the foundation upon which the entire fertilizer sector rests, but their prices are continually influenced by a complex array of factors. If prices continue to deteriorate and further revisions are necessary, a compelling case for selling may emerge in this scenario. Further revisions from NTR I think could constitute a sell case here, depending on the severity of it.

However, I perceive additional risk looming over NTR at the moment, stemming from the less-than-ideal guidance the company has been offering. I understand that it’s challenging for NTR to predict the entire year’s outcome and precisely forecast their earnings. Nevertheless, the substantial leap in revising the high end of EPS guidance from $7.5 to $5.6 raises concerns, and it appears that NTR might continue to make similarly significant adjustments in the upcoming quarters. This trend could contribute to a sense of uncertainty among investors regarding the company’s financial outlook. If NTR can’t have a finger on the pulse of the market it’s so heavily engaged in, why would we want any form of guidance from them? Expecting there to be persistent prices as we saw in 2022 may have been quite naive in hindsight.

Last Pointers

The fertilizers industry has been very volatile the last 12 months and I think that will continue going forward. Customers are trying to balance having efficient inventory levels and not be overextended as well. NTR will likely continue having increasing net incomes and that should come with a discount risk rate to the share price. That risk rate hasn’t been achieved just yet and I will be having a more neutral view of the company as a result, which brings me to a hold for NTR.