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Nutrien readies for fertilizer rebound

Cost cutting and an expanding retail footprint have left Nutrien well-placed to benefit from a rebound in fertilizer prices.

As the pandemic has limited options for travel and entertainment, many people are seeing their home with fresh eyes. They are investing in improvements, sprucing things up with paint and new accessories and expanding gardens. It is something to do and something to enjoy under these unusual circumstances.

One company that is helping make your garden grow and ensure your grocer has fresh produce is Nutrien Corp. (TSX:NTR).

Nutrien is  the world’s largest producer of agricultural fertilizers. This includes nitrogen and phosphates which it sells in bulk and at the retail level to farmers.

The Saskatchewan-based company was formed in 2018 from the merger of Agrium Corp. and Potash Corp. Potash was a globally dominant  fertilizer producer, while Agrium offered a retail network of about 2,000 stores. This network dominates in North America and Australia and is expanding in Latin America.  The merger provided a way for the companies to compete with large producers in Belarus and Russia.

Nutrien’s shares are down 17.8% year- to-date, falling to a low of $36.30 in March, before rebounding to their current level of $50.76.  They are up 15.7% in the last three months and its price to earnings (P/E) ratio is 26.

 Nutrien’s latest results are mixed. There are signs of rising demand for its products, but Nutrien cut its profit forecast as prices for ammonia and urea ammonium nitrate remain soft.  The company reduced the the top end of its 2020 earnings per share forecast to $1.90 from $2.10.

Revenue was $8.18 billion for the second quarter. (All figures in  U.S. dollars, except share price.)  Net income fell to $765 million from $858-million a year earlier. However, on an adjusted basis, it earned $1.45 per share, beating expectations of $1.33, helped by lower costs.

Nutrien logo fertilizerIndustrial demand picked up in Asia, where demand for urea was strong in India.  Urea exports to China are expected to pick up in the second half. This has been offset by weak demand in North America.

North American potash sales rose as American farmers planted more acreage with a more normal spring weather. However,   potash sales outside of North America declined about 40 per cent because of lower Chinese demand.

Discussion & Outlook:  Nutrien has strong fundamentals. While the business is at the bottom of the cycle, it stands to rebound as conditions improve.

The consensus is that fertilizer prices are at historic lows, but are unlikely to fall further. The company believes prices will start recovering in the second half of this year.

In a recent research note, RBC Dominion Securities analyst Andrew Wong said he expects Nutrien to continue generating strong free cash flow as prices gradually recover.

He notes that Nutrien is the most diverse and vertically integrated player in the business with an attractive earnings profile and a solid balance sheet. As oil prices rebound, it should also gain as farmers plant more corn which is used for ethanol, a gasoline additive.

Mr. Wong expects Nutrien’s  payout ratio to fall to sustainable levels as higher prices generate excess cash and that it will buy back shares and increase dividends as conditions improve. He also expects Nutrien to acquire more retail outlets in North America and continue an aggressive expansion in Brazil.

Dividend:  The $1.80 dividend yields 4.72%  and seems secure.

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Adam Mayers writes about investing and personal finance. He is a contributor to the Globe & Mail’s Globe Advisor and a contributing editor to Gordon Pape's Internet Wealth Builder newsletter. Adam was Business Editor and investment columnist at The Toronto Star and is the author of six books.

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