NOTutrien ltd. (New York stock market : RNT) is perfectly positioned to capitalize on the growing demand for fertilizer products, and its effectiveness in meeting this demand is evident in both its stock market and financial performance.
The current geopolitical situation has brought a lot of attention to the agricultural industry, with Ukraine being a major producer of wheat, corn and barley. At the same time, a large part of fertilizers, a necessary and complementary good for agriculture, is produced in Russia and Belarus, Russia producing 13% of the world total of potassium, phosphate and nitrogen fertilizers.
Due to the ongoing conflict, not only is the sowing season in Ukraine threatened, with the grain harvest expected to fall by 55%, but most of the fertilizer produced is trapped in these countries. Even if the crops are planted successfully, there will always be additional challenges, as transporting them out of Ukraine might be impossible.
As a result, rising levels of demand are hampered by less supply, which not only leads to shortages, but proliferates the already present inflation.
Agricultural products and fertilizers must nevertheless be produced, with all eyes on North America, and as agricultural production increases, these producers are looking to companies like Nutrien to meet their demand.
Nutrien, based in Saskatchewan, Canada, was founded in 2018 and has since become the world’s largest agricultural input and service company, producing and distributing millions of tons of potash, nitrogen and phosphate.
With a long-term perspective, the company prides itself on meeting economic, environmental and social priorities, with a focus on stakeholders.
I’m optimistic about Nutrien.
With a solid foundation anchored in strong fundamentals and a positive outlook for creating additional shareholder value, Nutrien has generated a return of over 90% over the past year, well above the return of around 15% of the S&P 500.
This increase is certainly warranted, with Ken Seitz, Interim President and CEO, commenting, “The benefits of Nutrien’s integrated business were demonstrated in 2021 as we delivered record financial results and made significant progress. on our long-term strategic goals, including our key sustainability goals. priorities. »
He continued, “The outlook for global agriculture and agri-input markets is very strong, and we are well positioned to deliver significant earnings and free cash flow growth in 2022.”
These favorable financial results start with substantial margins, with an operating margin of approximately 18% and a net margin of 11.7%. Similarly, the return on equity is 13.7%, with a return on assets of 6.5%.
Although the company experienced negative economic earnings from 2016 to 2019, in which the weighted average cost of capital exceeds the return on invested capital, essentially destroying value, it has been increasing since 2017, recovering to a gap of more than 4% in 2021. This means that the company is now creating value.
In the fourth quarter, net income of $1.2 billion was generated, an increase of 282% quarter over quarter, with a record adjusted EBITDA of $2.5 billion, up 221 % from quarter to quarter. The same positive trend continued in full-year 2021 results, with net income of $3.2 billion, up 593% year-over-year, and another record for the Adjusted EBITDA, up 94% to $7.1 billion.
This translates to diluted net earnings per share of $5.52 and adjusted net earnings per share of $6.23, year-over-year increases of 581% and 246%, respectively.
According to the company, free cash flow also increased 135% year-over-year, from $1.83 billion to $4.3 billion, providing additional opportunities for value creation for investors. shareholders through reinvestments in the company, dividends and share buybacks. In fact, throughout 2021, $2.1 billion has been returned to shareholders through dividends and share buybacks, and the company plans to allocate a minimum of $3 billion to dividends and share buybacks. share buybacks in 2022.
This exponential growth is certainly impressive, although it can be partially attributed to higher selling prices in the industry due to rising energy prices and global production shutdowns. Either way, sales growth has picked up again and is expected to do so in 2022.
Looking ahead, Nutrien provided guidance for 2022 of a low of $10.20 in adjusted net earnings per share and a high of $11.80; this includes the aforementioned plan to devote a minimum of $2 billion to share buybacks. Adjusted EBITDA is expected to follow, ranging from a low of $10 billion to a high of $11.2 billion.
It is evident that Nutrien has reaped financial successes, not only due to the current environment, but also due to the market in which it operates.
A favorable market with barriers to entry
Nutrien faces little competition in this industry, holding a 22.2% market share in the potash market. Amplified by the Russian-Ukrainian crisis, Russian potash fertilizer producer and exporter Uralkali, which previously held a 13.3% potash market share, is unable to operate normally due to the ongoing conflict.
There are only two major North American players left: CF Industries Holdings, Inc. (heart rate) and Mosaic Co. (MOS).
As a result, Nutrien unquestionably operates in an oligopolistic market, in which a few large companies dominate the market due to barriers to entry, conferring significant pricing power and a sustainable competitive advantage.
For example, fertilizer producers are subject to strict regulations due to the potentially hazardous and polluting nature of fertilizers. Additionally, the company has not only carefully managed capital expenditures to ensure the infrastructure needed to keep pace with growing demand, but has also achieved economies of scale, including through its network of potash mines. flexible and low cost.
It is obvious that Nutrien is in the right market to exploit the growing demand, and it has already put in place measures to achieve this.
Nutrien’s response to growing demand
In response to production uncertainty in Eastern Europe, Nutrien recently announced plans to increase its potash production capacity to ~15 million tonnes, an increase of nearly 1 million tonnes from to previous estimates. This equates to an almost 20% increase in production compared to 2020 and will represent more than 70% of the global production added during this period.
To reassure shareholders that the integrity of the business will not be compromised with this increased production, Seitz explained, “Nutrien is responding to this period of unprecedented market uncertainty by safely increasing the production of potash to help provide our customers with the inputs they need.
“We continue to closely monitor market conditions and will evolve our long-term plans to ensure we use our assets in a safe and sustainable manner that benefits all of our stakeholders.”
Such production should increase capital expenditure slightly as the company hires additional workers, although this should be easily facilitated by the abundant free cash flow that Nutrien has generated.
The Taking of Wall Street
As far as Wall Street is concerned, NTR stocks are currently in moderate buy form. This is based on 12 buy and six hold ratings given over the past three months. Nutrien’s average price target of $103.62 implies downside potential of -0.14%, with a price target high of $126 and a low of $63.20.
The Russian-Ukrainian conflict has undoubtedly disrupted and probably eliminated much of the supply, especially in agriculture and fertilizer production, which has led to an increase in demand from suppliers of other parts of the world.
Even before this newly established demand, Nutrien experienced substantial growth and delivered impressive financial and stock market performance to shareholders.
Through effective and efficient capital management, thereby creating barriers to entry into this market, Nutrien has placed itself in the ideal position to take advantage of this tailwind of increased demand towards future success.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.