On today’s Breakouts report, there are nine stocks on the positive breakouts list (stocks with positive price momentum), and 19 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a top performing stock that is in correction territory, coming close to appearing on the negative breakouts list - Nutrien Ltd. (NTR-T). Its share price has declined 14 per cent since peaking at a record high in April. The stock is currently finding strong technical support around the $120 level.
On Tuesday, there was unusual trading volume in this stock. On the final trading day of May, the share price rallied 3.5 per cent on high volume with approximately 6.7 million shares traded, well above the three-month historical daily average trading volume of approximately 3 million shares.
The company has incredible earnings growth forecast for this year and is currently trading at a reasonable valuation. The average target price is approximately $155, implying the share price may rally roughly 26 per cent over the next year. On June 9, management will discuss its strategic priorities and objectives during a virtual investor update, which may give the share price a bit of a lift. However, the next major catalyst is in August when the company will be reporting its second-quarter earnings results, historically its seasonally strongest quarter with record earnings anticipated by the Street.
A brief outline on Nutrien is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Saskatchewan-based Nutrien produces low-cost potash, nitrogen, and phosphate, which are used to fertilize crops. Nutrien has four main operating segments: retail, potash, nitrogen, and phosphate. There is seasonality in the company’s business with the second quarter generating the highest earnings.
Nutrien was formed when the merger between Agrium Inc. and Potash Corporation of Saskatchewan Inc. was completed in Jan. 2018.
The stock is dual-listed, trading on the Toronto Stock Exchange as well as the New York Stock Exchange under the same ticker, NTR.
Industry fundamentals
There are positive conditions.
On the first-quarter earnings call, interim president and chief executive officer Ken Seitz said, “Global grain and oilseed inventories were well below historical average levels entering 2022, and the conflict in Ukraine has led to further tightening of supplies. Corn, soybean and wheat futures prices are 50 per cent to 90 per cent above the 10-year average and are trading at elevated levels on a multiyear basis. Prospective crop margins are significantly above historical average levels as the increase in revenues from higher crop prices has more than exceeded the projected increase in input costs.” He added, “Financial sanctions and other restrictions imposed on Russia and Belarus have constrained potash supply with minimal exports from this region reported since early March. These two countries represent approximately 40 per cent of global potash exports, and there is limited available for production capacity in other regions to help fill this supply gap…We are discussing these supply challenges in the context of 2022; however, we believe these issues could extend well beyond this year.”
Investment thesis
- Industry leader. Nutrien is the largest potash producer in the world and the third-largest nitrogen producer globally.
- High barriers to entry.
- Robust earnings momentum in 2022.
- Positive agriculture fundamentals. Rising crop prices, including corn, soybean and wheat prices, given low stocks-to-use ratios (demand rising faster compared to supply). With higher crop prices, farmers are applying more fertilizer in order to maximize their yields/harvests (higher return on investment), resulting in higher fertilizer prices and sales volumes.
- Healthy balance sheet. Providing the company with the financial flexibility to fund organic and acquisition growth. As at Dec. 31, the adjusted net debt-to-adjusted EBITDA ratio stood at 1.4 times.
- Solid free cash flow generation.
- Committed to returning capital to investors through dividends and share buybacks. Between 2018 and 2021, the dividend has increased by 15 per cent. Year-to-date, the company has repurchased roughly 9 million shares (as at April 29) for approximately $740-million. Management set a target of allocated $2-billion to share repurchases in 2022. However, Mr. Seitz said at BofA Securities’ 2022 Global Agriculture and Materials Conference held on March 2 that, “We would evaluate the opportunity to do additional buybacks come midyear and that’s part of that evaluation process.”
- Potential increase in potash production. In 2022, management targets record potash volumes of between 14.5 million and 15.1 million tons, but has operating capacity of 18 million tons.
Quarterly earnings results
After the market closed on May 2, the company reported first-quarter financial results that were relatively in-line with expectations. The company reported record adjusted EBITDA of US$2.62-billion, just shy of the consensus estimate of US$2.7-billion, but up significantly from US$806-million reported last year. Adjusted earnings per share was US$2.70, up from 29 US cents reported during the same period last year, but slightly below the Street’s forecast of US$2.75.
However, what really drove the stock was management’s guidance for 2022. Management lifted its earnings targets for this year, expecting adjusted EBITDA to come in at between US$14.5-billion and US$16.5-billion, up from its previous guidance of between US$10-billion and U.S. $11.2-billion. Adjusted earnings per share is anticipated to be between US$16.20 and US$18.70, up from prior guidance of between US$10.20 and US$11.80. This positive outlook sent the stock price soaring by 6 per cent the following trading day.
On June 9, management will be hosting a virtual investor update. During the meeting, management will be discussing its strategic priorities and objectives as well as remarking on its ESG performance.
Returning capital to shareholders
The company pays its shareholders a quarterly dividend of 48 US cents per share, or US$1.92 per share on a yearly basis, equating to a current annualized yield of 2 per cent.
In Feb., the company announced a 4-per-cent dividend hike, lifting its quarterly dividend to its current level of 48 US cents per share from 46 US cents per share.
In 2021, the company repurchased 15 million shares as part of its share buyback program.
Analysts’ recommendations
According to Bloomberg, the stock has 17 buy recommendations, four neutral recommendations and one ‘sell’ recommendation (from Morningstar’s Seth Goldstein).
Firms providing research coverage on the company include: ARC Independent Research, Atlantic Equities, Berenberg, BMO Nesbitt Burns, BNP Paribas, CIBC World Markets, Citi, Goldman Sachs, HSBC, J.P. Morgan, Mizuho Securities, Morgan Stanley, Morningstar, Piper Sandler, Raymond James, RBC Dominion Securities, Scotiabank, Stifel, and TD Securities.
Revised recommendations
In May, multiple analysts revised their expectations. They include:
- CIBC’s Jacob Bout increased to US$127 from US$120.
- Goldman Sachs’ Adam Samuelson to US$133 from US$129.
- JP Morgan’s Jeff Zekauskas to US$120 from US $95.
- Raymond James’ Steve Hansen to US$125 from US$105.
- TD’s Mike Tupholme to US$130 from US$125.
Financial forecasts
Robust growth is expected for the company this year. The Street is forecasting EBITDA to come in at US$15.25-billion in 2022, up from US$7.13-billion in 2021, and US$12.24-billion in 2023. The consensus earnings per share estimates are US$17.46 in 2022, up from US$6.23 in 2021, moderating to US$14.07 in 2023.
Earnings forecasts have been rising sharply. Four months ago, the Street was expecting EBITDA of US$6.15-billion in 2022 and US$9.46-billion in 2023. The consensus earnings per share estimates were US$5.27 in 2022 and US$9.30 in 2023.
Valuation
According to Bloomberg, the stock is trading an enterprise value-to-EBITDA multiple of 5.3 times the 2023 consensus estimate, below its historical average multiple of 8.4 times. In comparison, industry peer Mosaic Co. (MOS –N) is trading at an EV/EBITDA multiple of 4.2 times the 2023 consensus estimate, and CF Industries Holdings Inc. (CF-N), another industry player, is trading at an EV/EBITDA multiple of 5.5 times the 2023 consensus estimate.
Target prices expressed by analysts are mainly in U.S. dollars. The average one-year target price is US$121.67, or approximately $155.72 (Canadian), implying the share price has roughly 26-per-cent upside potential over the next year. Target prices range from a low of US$80 (from Morningstar’s Seth Goldstein) to a high of US$135 (from RBC’s Andrew Wong and BNP Paribas’ Rikin Patel).
Insider transaction activity
Quarter-to-date, there has not been any trading activity in the public market reported by insiders.
Chart watch
The stock has been an outperformer. Year-to-date, the share price has rallied 30 per cent, making it the fifth-best performer in the S&P/TSX Materials Index. On April 18, the stock closed at a record high of $144.75. However, in recent weeks, the share price has retreated 14 per cent with the stock entering correction territory.
In terms of key technical resistance and support levels, the share price has a major ceiling of resistance around $145. Over the last three months, the share price has jumped from around the $90 level to the mid $140′s, a 50 per cent retracement from its peak suggests there is technical support around the $120 level. Failing that, there is strong technical support around $100, close to its 200-day moving average (at $100.32).
ESG Risk Rating
The company has a ‘medium’ risk rating with a score of 28 from Sustainalytics and an “AA” rating from MSCI.
This is not an investment recommendation.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.
Jennifer Dowty