Nutrien (NTR) is a producer of potash, phosphate and nitrogen. It produces and distributes key elements required for fertilizer production. However, the past few days have been volatile.
Here, I’ve highlighted why it fluctuates, while also stating that there is actually no worst-case scenario for any material.
If anything, the bullish thesis continues to improve as more news streams appear to cement the overall thesis.
So I think this investment provides investors with a very reasonable risk-reward profile.
This article continues last week’s article on Nutrien.
Investor sentiment on NTR stock turns edgy
As you can see above, the past few days have sold off after a parabolic rise in fertilizer stock values over the past month.
Several factors contributed to this sell-off.
In the first example, the upswing attracted many momentum traders who were chasing stops. In any economic downturn, they take profits.
Second, this has become very sensitive to the news flow. Any indication, or better yet, any rumors about the dynamics that have us here to reduce, these stocks should be sold.
However, as we’ll discuss, there are different angles to bullish on the name or industry in general.
Nutrien’s revenue growth rate will remain strong
As I discussed in my last post, everyone has more or less accepted the fact that the first quarter of 2022 will be very strong for Nutrien.
The question that remains open is what will the back end look like in 2022? Will we see a sharp drop in fertilizer demand? Or will fertilizer demand remain high?
This is what I want to stress to the reader. Over the past month, analysts have begun revising their forecasts for the end of the year upwards.
Yes, revenue growth in Q4 2022 is currently expected to be negative 6% y/y.but you don’t likeSo much so that it is negative or not; what matters here is the change in mood.
you want to see change The revenue growth rate is higher.
That’s the paper there. There is more good news.
What happened recently?
As you can see above, Nutrien estimates potash production in 2022 at 14.3 million tonnes. This guidance was issued about 31 days ago.
Then Nutrien released this press statement yesterday:
As you can see above, Nutrien now expects potash to increase to an estimated 15 million, a 5% increase from its high end.
But most importantly, this increased production will be produced in the second half of the year.
This means that Nutrien’s outlook for the inventory channel remains low for the full year through the second half of 2022.
So, not only are inventories tight in the first half, but as widely reported, the second half appears to be tight as well.
Given that analysts expect to report negative 6% year-over-year revenue growth in the fourth quarter of 2022, you can clearly see that these estimates will have to be revised upwards.
In fact, we know that Nutrien will produce 13.6 million tons of potash in 2021. The current target is to increase production by 10%, with most of that growth coming online only in the second half of 2022.
it’s simple physics
Many investors have grown too accustomed to software companies. When there is a lot of demand for a product or service, you just write some code and deploy it to the market right away.
The problem with fertilizer is that you need to get it out of the ground. You need to recruit people from a tight labor market. You have to get them trained to work safely. Then you need to transport fertilizers through all the supply chain challenges.
It takes time. That’s why, even with pent-up demand for potash and other much-needed fertilizers, excess supply will only emerge in the second half of 2022.
Post-mortem (investment risk)
Russia and Belarus could easily export their potash supplies if sanctions on Russia are lifted soon. I think it will take time.
One thing is a ceasefire with Ukraine. Lifting sanctions is a completely different matter. Sanctions are likely to continue for some time. Russia and the West will not be best friends again tomorrow.
Not after you put politicians in power. You can almost forget about that.
In addition, there are now meaningful supply chain disruptions across Eastern Europe. It takes time to get the potash out.
In fact, Russia has imposed self-sanctions on itself to stop fertilizer exporters from bringing supplies to Europe, causing huge pain in Europe’s high food prices.
What’s more, fertilizers are transported by trains and ships. Many shipping and logistics companies are staying away from the area for safety reasons.
Additionally, the news that Russia is supplying China with fertilizers has led many to believe that China will take this supply and sell it to the world.
First, China has not yet established distribution channels and contacts. This can take a long time to play out.
Second, and more importantly, China wants its own fertilizer. Why are they exporting it? They also have a large population to feed.
There are a lot of moving parts and obviously, the situation is very fluid. Also, in the background, Latin American countries have also called for the lifting of export sanctions against Russia, as food prices are rising rapidly in these countries and they also require large quantities of fertilizers.
Even if Nutrien wanted to, it simply couldn’t supply potash to everyone. This will cause the price of potash and other fertilizers to continue to rise this year.
Oh, and by the way, did I mention there’s also a rail strike in Canada? I wonder what would happen if there was a rail strike and Canadian fertilizer exporter Nutrien used the rail to get fertilizer out.
To preempt your question, yes I’m bullish. Note I have no stock here. I took a stake in one of Nutrient’s smaller peers. Whatever decision you make, good luck and happy investing.