This Canadian Stock is Over 20% Undervalued

This fertilizer company will benefit from stronger housing starts and home renovations in 2025.

Ruth Saldanha 6 December, 2023 | 1:31AM
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Key Morningstar Metrics for Nutrien Stock

As the year comes to an end, we are entering holiday season, which is a time for retail therapy, spending time with loved ones, and yes, food. We’ve featured retail stocks to consider, and we’ve talked about food stocks, chocolate stocks, and grocery stocks, but what about the fertilizers that makes the growing of all these crops possible in the first place? This Canadian fertilizer company is trading at a 22% discount to our fait value estimate, has a narrow economic moat, and has a 3.6% forward dividend yield. The stock is Nutrien.

Nutrien’s Retail Business Profits Will Stabilize

Nutrien, Ticker NTR, is the world’s largest crop nutrient company by capacity.  It is the largest agricultural retailer in North America and Australia, with a growing presence in Brazil. Morningstar analyst Seth Goldstein awards Nutrien’s stock a narrow economic moat due to its cost advantage in potash and nitrogen. Nutrien’s potash mines are located in Canada and sit on the low end of the global cost curve.

Goldstein notes that the largest risk is fertilizer prices, which have fluctuated wildly in the past and are prone to do so again when supply and demand are out of balance. While fertilizer demand has historically been steady over a number of years, demand can rapidly decline in a single year due to weather issues that result in fewer planted acres, weighing on fertilizer prices.

At current prices, Goldstein views Nutrien shares as undervalued. He thinks the market is concerned that Nutrien's retail business will see lower midcycle profits amid a recent profit decline. However, he expects Nutrien's retail business profits will stabilize. The stock is currently trading at 4-stars. For Morningstar, I’m Ruth Saldanha.

 

bulls Nutrien Stock Bulls Say

  • Declining arable land per person will force growers to be more productive and should drive growth in a variety of crop inputs.
  • Potash application rates in China and India lag scientifically recommended levels. With these two countries working to secure food supply, increasing potash application is a relatively pain-free way to raise crop yields and food production, which will result in higher demand growth for potash.
  • Fertilizer prices will rise as demand will outpace supply in the coming years.

bears Nutrien Stock Bears Say

  • Volatile pricing and demand for crop nutrients have characterized Nutrien's business during the past few years, highlighting the cyclical nature of the company's cash flows.
  • Long-term oversupply threatens to reduce the marginal cost of production in potash and lower long-term prices. This includes BHP's Jansen greenfield project and brownfield expansions from existing producers.
  • Fertilizer prices have fallen below midcycle levels, which will weigh on Nutrien's profits.

 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Nutrien Ltd70.32 CAD-0.16Rating

About Author

Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Morningstar.ca. Follow her on Twitter @KarishmaRuth.

 
 
 

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