Nutrien (NTR) (TSE:NTR), the world’s largest potash producer and crop nutrient manufacturer, has seen its share price plummet, falling 60% since its 2022 peak, as you can see below. Nutrien’s customers (farmers) are having a rough time. While prices for inputs like fuel and labor have remained high, prices for their products like corn and soybeans have fallen. Nutrien has not been spared, as prices for the fertilizers it sells, like potash, have fallen even further. In 2025, however, we could see a recovery. I remain bullish on Nutrien and believe its stock is “dirt cheap.”
Why CF Industries outperforms Nutrien
When I look at a company, I like to compare it to its competitors. Nutrien has a strong position in potash production and appears to have a cost advantage over rivals like The Mosaic Company (MOS). Nutrien also makes nitrogen fertilizers, but its stock has performed significantly worse here than its main competitor, CF Industries (CF). The question is, why?
Well, Nutrien’s strategy may not be optimal compared to CF Industries. CF has spent significantly less than 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 overall debt profile.
CF seems to be maniacally focused on its cost advantage and maximizing its asset utilization. I like this strategy because the lowest cost producer of a commodity has a competitive advantage (aka moat). Why focus on production growth when you’re already the market leader (like Nutrien is with Potash)? You can get earnings per share growth just by buying back shares.
Not to mention, if you don’t expand production too much, the price of the commodity you sell is more likely to rise (due to shortages). Oil majors experienced this after significantly underspending capital in 2020 and 2021.
Still, executives at Nutrien’s investor day presentation talked a lot about growth and portfolio optimization. Companies that rebalance their portfolios too often, focusing on the current return on invested capital, often sell assets at cyclical lows.
Nutrien could make that mistake with its assets in Argentina, which is in a modern depression. It could also be the wrong time to focus on production growth. Overall, I think Nutrien’s strategy still has room for improvement and that CF Industries has put forward a great plan.
Nutrien shares are dirt cheap
So we found that even though Nutrien is a dominant player in the plant nutrients space, it still has room for improvement. I think some of the company’s capital allocation mistakes, as well as the ongoing downturn in commodities, have led to Nutrien shares trading at a “dirt” low price.
While 2022 was an exceptional year for Nutrien due to extremely high potash prices, 2020, 2021 and 2023 were fairly normal years. The company had a number of non-cash losses and the like during those years, but reported adjusted earnings of $1.027 billion, $3.557 billion and $2.206 billion, respectively, averaging $2.26 billion. The company had similar free cash flows during those years, averaging $2.20 billion.
In 2020, 2021 and 2023, potash prices averaged $389 per tonne, which is slightly above the marginal cost of production of $325/ton and is in line with today’s price levels. At today’s prices, some of the marginal producers of potash may cease operations, which would reduce supply. Consequently, potash prices should eventually rise along with costs and demand. Therefore, I believe Nutrien’s normalized earnings power (the amount the company will earn in an average year) is around the previously calculated value of $2.26 billion, which corresponds to a normalized P/E of 10.
This earnings power is also supported by Nutrien’s $39 billion of tangible assets, which represents a yield on tangible assets of 5.8%. This yield is slightly above the rate at which Nutrien currently issues debt (5.2% to 5.4%).
When it comes to resource companies, I like to invest in companies whose earnings are backed by tangible (hard) assets. As Bruce Greenwald wrote in Security Analysis’ 6th edition, “If a company’s projected earnings levels imply a return on capital that is well above its cost of capital, it will attract competitors, which in turn drives down the company’s earnings and thus its value.”
In a time of 5% interest rates, a commodity company earning a return on tangible assets of over 15% is probably earning too much (because it is earning far more than it has to pay on debt). Such an attractive return attracts competition, which drives commodity prices down. Conversely, if the return on tangible assets is well below 5%, it can usually be assumed that it is earning too little. In this case, companies stop expanding production, which drives commodity prices up.
Nutrien currently earns a 2% yield on tangible assets ($0.79 billion divided by $39 billion), so it appears to be significantly below average. That often means earnings will improve in the coming years, and at that valuation, the stock should follow.
Is NTR stock a buy according to analysts?
Currently, 11 out of 16 analysts covering NTR give the stock a Buy rating, two give it a Hold, and three give it a Sell rating, resulting in a consensus rating of Moderate Buy. The average price target for NTR stock is $59.83, implying an upside potential of 26.4%. Analysts’ price targets range from a low of $43 per share to a high of $75 per share.
View more NTR analyst ratings
The conclusion on NTR shares
Nutrien has underperformed CF Industries because CF has pursued a better strategy that focuses obsessively on costs and efficiency. However, that leaves Nutrien room to improve and reap the rewards. Nutrien is significantly underperforming, earning only 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 P/E of 10. The company’s earnings should rise in line with potash prices in 2025. For that reason, I am bullish on NTR.
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