While he warned “patience is required as near-term headwinds persist,” Scotia Capital analyst Ben Isaacson raised both Nutrien Ltd. and peer CF Industries Holdings Inc. to “sector outperform” from “sector perform” on Monday, calling it “a contrarian upgrade on limited downside.”
“It’s true, both companies are likely to miss the Street’s Q1 EBITDA by approximately 15 per cent, estimates for the full year need to come down, and near-term catalysts remain elusive,” he said. “In fact, we’re not even sure NTR will hit the low end of its ‘23 EBITDA guide. So, to be clear, we’re not bullish, and so won’t attempt to paint an overly optimistic picture. But, the risk/reward balance is definitely starting to shift on several fronts, and we’d rather be a little early on this trade than miss it.
“Key points: Valuations for both NTR and CF are now well below Bear Mid-Cycle Values; The global nitrogen complex sits well below marginal cost; it’s unsustainable; Our energy team argues the entire EU (TTF) gas forward strip has upside; While potash hasn’t bottomed, Asian market activity is picking up pace; Farmer economics remain supportive of crop input demand, particularly for nitrogen; and Investor sentiment is deflated; feedback suggests negatives (Q1 misses, negative revisions) are known and priced in.”
Mr. Isaacson said he expects “a slew” of first-quarter earnings miss for fertilizer stocks in the upcoming earnings season with Mosaic Inc. ( “sector perform” and US$60 target) being the lone exception following a recent guidance raise.
“While everyone has seen pricing tumble below even the most bearish of expectations for this spring , what’s been more difficult to track is limited demand,” he said. “Simply put, farmer and dealer or distributor engagement has been poor, despite strong farmer economics coupled with affordable crop input prices. And, if poor volume/pricing wasn’t punitive enough for Q1 results, on top of that we have to add higher cash costs for those fertilizer producers running assets at low utilization rates – particularly for Canadian potash production.
“Watch for two investor debates to emerge. First, the narrative from fertilizer producers will almost certainly be ‘whatever was lost in Q1 will be made up in Q2′. ... Second, the Street will now debate how much full-year estimates will need to be reduced by weak spot prices. This debate should impact MOS more than NTR/CF that are somewhat protected by $2/mmbtu Henry Hub.”
Following cuts to his first-quarter EBITDA estimates, Mr. Isaacson lowered his target for Nutrien shares to US$90 from US$95, below the US$95.75 average on the Street. His CF target slid to US$95 from US$100, also beneath the consensus of US$102.12.