Nutrien (NTR) (TSE:NTR), the world’s largest potash producer and crop nutrient company, has seen its stock crushed, falling 60% since its peak in 2022, as you can see below. Nutrien’s customers (farmers) are having a difficult time. While the price of inputs like fuel and labor have remained high, the price of their outputs, like corn and soybeans, have fallen. Nutrien has not been immune, with the price of the fertilizers it sells, like potash, falling lower. However, we may see a rebound in 2025. I remain bullish on Nutrien and believe its stock is “dirt” cheap.
Why CF Industries Is Outperforming Nutrien
When I look at a business, I like to compare it to its peers. Nutrien has a strong position in Potash production and seems to have a cost advantage over peers like The Mosaic Company (MOS). Nutrien also produces nitrogen fertilizers, but its stock has significantly underperformed its main competitor here, CF Industries (CF). The question is, why?
Well, Nutrien’s strategy may be suboptimal compared to CF Industries. CF has been spending significantly less than its depreciation and amortization on capital expenditures in recent years, not to mention reducing its debt profile. Nutrien has done the opposite, expanding its asset base and total debt profile.
CF seems to focus maniacally on its cost advantage and maximizing its asset utilization. I like this strategy because the low-cost producer of any commodity has a competitive advantage (A.K.A. moat). Why focus on production growth when you’re already the market share leader (Like Nutrien is in Potash)? You can achieve earnings per share growth just by repurchasing shares.
Not to mention, when you don’t expand production too much, the price of the commodity you’re selling is more likely to increase (due to shortages). Oil companies experienced this after significantly underspending on capital expenditures in 2020 and 2021.
Still, in Nutrien’s investor day presentation, executives talked a lot about growth and optimizing the portfolio. Companies that rebalance their portfolio too often, focusing on current returns on invested capital, often sell assets at cyclical bottoms.
Nutrien may be about to make this mistake with its assets in Argentina, which is in a modern-day depression. This may also be the wrong time to focus on production growth. Overall, I think there’s room for improvement in Nutrien’s strategy and that CF Industries has laid out a great blueprint.
Nutrien Stock Is “Dirt” Cheap
So, we’ve established that despite being a dominant player in crop nutrients, even Nutrien has room for improvement. I think some of the company’s capital allocation blunders, as well as the ongoing commodity downturn, have left Nutrien’s stock trading at a “dirt” cheap valuation.
While 2022 was an anomaly year for Nutrien due to extremely high potash prices, 2020, 2021, and 2023 were pretty standard years. The company had a bunch of non-cash losses and things of that nature in these years but reported adjusted earnings of $1.027 billion, $3.557 billion, and $2.206 billion, respectively, for an average of $2.26 billion. The company had similar free cash flows in these years, averaging $2.20 billion.
In 2020, 2021, and 2023, potash prices averaged $389 per metric tonne, which is slightly above the $325/tonne marginal cost of production and where prices sit today. At today’s prices, some of the marginal producers of potash may shutter their operations, reducing supply. Consequently, potash prices should eventually drift higher alongside costs and demand. Therefore, I believe Nutrien’s normalized earnings power (the amount of money it will make in the average year) is around the $2.26 billion figure calculated earlier, giving it a normalized P/E ratio of 10x.
This earning power is also supported by Nutrien’s $39 billion of tangible assets, representing a 5.8% return on tangible assets. This return is slightly above the rate at which Nutrien is currently issuing debt (5.2% to 5.4%).
When it comes to commodity companies, I like to invest in businesses whose earnings are supported by tangible (hard) assets. As Bruce Greenwald wrote in the 6th Edition of Security Analysis, “If projected profit levels for a firm imply a return on assets well above the cost of capital, then competitors will be drawn in, that in turn, will drive down profits and with them the value of the firm.”
In an era of 5% interest rates, a commodity company earning above a 15% return on tangible assets is likely over-earning (because it is earning far in excess of its cost of debt). Such an attractive return attracts competition, which drives commodity prices down. Conversely, if it is earning well below a 5% return on tangible assets, you can usually conclude that it’s underearning. When this happens, companies stop expanding their production, which drives commodity prices up.
Nutrien is currently earning a 2% return on tangible assets ($0.79 billion divided by $39 billion), so it appears to be significantly underearning. This often means that earnings will improve in the years ahead. And at this valuation, the stock should follow.
Is NTR Stock a Buy, According to Analysts?
Currently, 11 out of 16 analysts covering NTR give it a Buy rating, two rate it a Hold, and three analysts rate it a Sell, resulting in a Moderate Buy consensus rating. The average NTR stock price target is $59.83, implying upside potential of 26.4%. Analyst price targets range from a low of $43 per share to a high of $75 per share.
The Bottom Line on NTR Stock
Nutrien has underperformed CF Industries because CF has employed a superior strategy, focusing maniacally on cost and efficiency. But this leaves room for Nutrien to improve and reap the rewards. Nutrien is significantly underearning, with just a 2% return on tangible assets. Still, I believe its normalized earnings power is much higher and that the stock is “dirt” cheap at a normalized PE ratio of 10x. The company’s profits should increase alongside potash prices in 2025. For this reason, I am bullish on NTR.
