Nutrien Ltd. And The Mosaic Co. are looking forward to a better 2020—if the weather co-operates.
The US experienced unprecedented wet conditions in the first half of this year. Record precipitation led to delayed planting. What’s more, planting is believed to have been prevented on more than 10 million acres—a record. Indeed, the situation was so severe it nearly eliminated global demand growth for crop inputs. Despite this, agriculture stock Nutrien Ltd. (TSX—NTR) delivered growth in key metrics for the first half.
Nutrien Ltd. is the world’s largest provider of crop inputs and services, helping growers increase food production in a sustainable manner. The company produces and distributes 27 million tons of potash, nitrogen and phosphate products worldwide. Plus, it operates a leading agriculture network that serves over 500,000 grower accounts. The network consists of over 1,700 retail locations in seven countries, offering a complete range of crop nutrients.
Earnings, cash flow, dividends up
For the six months ended June 30, 2019, Nutrien’s adjusted earnings per share were US$1.77 (all figures in US dollars unless otherwise noted), up from $1.63 in last year’s first half.
Earnings from continuing operations rose 21 per cent to $899 million. The increase was supported by higher global nutrient prices, solid operational results and the continued benefit of synergy realizations from the merger between Agrium and Potash that created Nutrien in 2017.
EBITDA (earnings before interest, taxes, depreciation and amortization) declined six per cent at the retail business and 30 per cent at the phosphate segment. But it rose 43 per cent at the potash business and 30 per cent at the nitrogen segment.
Free cash flow was $1.7 billion, up 47 per cent. Strong free cash flow has let Nutrien increase its dividend five per cent to $0.45 a share payable October 17. It has also let the company continue to buy back shares. Over the past 18 months Agrium has allocated $3.7 billion to buying back over 11 per cent of its outstanding shares.
Altogether, Nutrien has returned $5.2 billion to its shareholders through share buybacks and dividends over the past 18 months. These are the types of actions over which the company has control. Other factors over which it has control include cost reductions and internal growth. Management expects to achieve over $650 million in annual run rate synergies by the end of the year. And it continues to make investments to grow its retail business.
If the weather holds, 2020 will be a better year
As for factors over which it doesn’t have control, such as weather, 2020 looks like it’s shaping up to be a better year if the weather cooperates. That’s because demand for grains and oilseeds is still growing. And lower crop inventories have translated into higher selling prices. Given this situation, Nutrien expects strong fall fertilizer applications as growers begin to plan for 2020.
Nutrien’s shares trade at a reasonable 18.0 times the company’s likely 2019 earnings of C$3.74 a share. Its annual dividend of C$2.38 a share yields 3.5 per cent.
Nutrien is a buy for long-term growth and income.
Mosaic upgraded to ‘outperformer’
Toronto-based CIBC World Markets analysts Jacob Bout and Rahul Malhotra see fit—after the massive sell-off post second quarter 2019 results—to upgrade The Mosaic Co. (NYSE—MOS) to Outperformer from Neutral. They lower their price target slightly to $27 per share from $28 on slightly lowered phosphate price assumptions in their discounted cash flow model.
There are two primary reasons behind the upgrade. One of the reasons is that they expect a robust 2020 for the US wholesale fertilizer demand. They say: “At this point we expect 95 million corn acres in 2020 (or approximately 10 million more corn acres versus 2019 on the back of higher corn pricing and 10 million in prevented plant insurance in 2019).
“Corn uses 15 per cent more phosphate than soybean, and the vast majority of Mosaic’s phosphate volumes go into the US market. Secondly, at the current share price, Mosaic would be a cost-effective way to gain access to nine-plus metric tonnes of potash production (assuming no value for Fertilizantes or Phosphate assets, we calculate Mosaic trades at approximately 50 per cent of potash replacement value).
“Post Mosaic’s second quarter 2019 results, we have taken down our second half of 2019 adjusted EPS to $0.82. Our 2020 adjusted EPS estimate is reduced to $2.30 from $2.44.”
This is an edited version of an article that was originally published for subscribers in the September 2019/Second Report of The MoneyLetter. You can profit from the award-winning advice subscribers receive regularly in The MoneyLetter.
The MoneyLetter, MPL Communications Inc.
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