The combination of Putin’s war machine ravaging the civilian population of Ukraine, COVID-related disruptions to supply chains and the near total breakdown of U.S. – China relations has broken the globalized economy.
The political maneuvering is ongoing, as the U.S. seeks to strengthen ties with allies. NATO obviously, as the war in eastern europe has motivated a pretty strong and coordinated response amongst NATO countries for aid to Ukraine against Russia. But also the existential angst of European countries suddenly realizing their own vulnerability. France and Germany have ramped their military buildups. Scandinavian countries are doing the same, even as they seek the fast track into NATO…
Perhaps less obvious are U.S. moves in Southeast Asia. In just the last couple of months, the U.S. has agreed to various military deals with Japan, the Philippines, Australia, South Korea and Taiwan.
Of course, corporations are much better equipped to respond decisively and quickly to geopolitical threats to their operations. And so the move to reroute supply chains out of China and Russia are well past the point of no return.
Still, there are some obvious bottlenecks: natural gas and lithium are fairly obvious ones. Europe’s loss of Russian oil has been mostly offset. The U.S. is quickly expanding its capacity for liquid natural gas (LNG) supply to Europe.
And lithium companies are scrambling to expand their capacity in North and South America to break China’s dominance (China supplies +90% of the world’s lithium and is home to the largest lithium battery maker in the world, NATL).
But today, we’re gonna talk about another bottleneck that’s grabbing fewer headlines than energy and lithium. Fertilizer…
A Growth Opportunity
Nitrogen, phosphate and potash and the three most important ingredients for fertilizer. And this graphic that I’m borrowing from Bloomberg shows pretty much everything you need to know about global supply of these key ingredients…
Don’t worry about India – even though it is a major producer for both nitrogen and phosphate, it is not enough to satisfy its own demand and so is a net importer of fertilizer materials.
That leaves the majority of fertilizer exports to China, Russia and Belarus – countries that rank pretty high on the “Not U.S. Friendly” list.
Now, agriculture products are not included in the sanctions on Russia and its pal, Belarus. It hasn’t really mattered – potash supply out of Belarus, for instance, was down roughly 50% in 2022…
Supply disruptions made 2022 a banner year for fertilizer companies as prices skyrocketed. And shares of U.S. traded fertilizer companies jumped 60% to 180% higher.
Nearly all of last year’s price gains have reversed, as you can see on this Bloomberg chart…
And of course, the share prices for fertilizer companies have just about completed their own round-trip…
The name of the game is “buy low, sell high.” And the timing looks good to buy low on the world’s largest fertilizer company, Nutrien, ltd.
Nutrien (NYSE: NTR)
Current price: $75
52-Week Range: $68.82 – $117.25
Market Cap: $38 billion
2022 Revenue (est): $32.7 billion
2023 Revenue (est): $30.5 billion
Forward P/E: 7.3
Dividend: $2.12 (2.8% yield)
2023 Earnings Growth: -20%
12 Month Price Target: $105
I will readily admit that there could be more upside potential for Intrepid Potash (NYSE: IPI) or Mosaic (NYSE: MOS). And there’s no doubt that all three will benefit as fertilizer supply chains (especially those in the Western Hemisphere) shift away from suppliers with geopolitical risk – ie Russia, Belarus and China. But as the big dog in the space, I say that Nutrien offers the best risk/reward scenario.
Nutrien pays a better dividend than Mosaic (Intrepid doesn’t pay one). It has a larger share buyback program, which has retired 25% of its outstanding shares since 2018. And Nutrien is a cash cow – generating $8 billion in free cash flow on $37 billion in trailing 12-month revenue.
Now, Nutrien won’t have as good a year in fiscal 2023 as it did in 2022. Revenue is expected to fall from $32.7 billion to $30.5 billion. And the reason has a lot to do with the price chart above…
When Russia invaded Ukraine, it was obvious that the supply of fertilizer products was an immediate problem. Big agriculture exporters like Brazil stockpiled as much as they could. That’s why prices spiked so high in mid-2022. And it’s also why prices have fallen so dramatically – those inventories are still being worked off, and purchase commitments for the coming year are running lighter than normal.
On its last earnings conference calls, Nutrien discussed all this, and also added that low prices have removed some of the sense of urgency regarding supply. Farmers can afford to wait, at least for now…
But also, with inventories currently sitting at mostly below-average levels, Nutrien is confident that total global demand will approach normal levels – for example, they forecast global potash demand in the 63-67 million range, down slightly from last year’s 70 million tons. Nutrien expects to deliver 13.8 – 14.6 million tons of potash in the coming year.
So while the immediate situation for the fertilizer market is a bit unpredictable, the long-term trend is solid. Demand from Brazil and even Australia will increasingly favor stable North American supply. And both climate and demographic trends will mean incrementally higher fertilizer demand year after year.
Due to its size, Nutrien is in the best position to ride out the temporary uncertainty in the fertilizer market. Because of its dividend and share buyback program, I expect it will have the most stable share price of any of its competitors.
But perhaps most important, Nutrien shares are cheaper than they were even before the Russian invasion of Ukraine. At the end of Q4 21, Nutrien had a forward P/E of nearly 10.
Right now, that forward P/E is just above 7.
With farmers likely to refill dwindled inventory while prices are down, I expect current fiscal 2023 revenue estimates of $30.5 billion are overly conservative. So, buy shares of Nutrien under $82, in anticipation of a move to $105 in the next 12 months.
That’s it for me today, take care and I’ll talk to you Wednesday…
Chief Investment Strategist
Pro Trader Today