Significant Upgrade With the Russia-Ukraine conflict causing prices to spike on supply concerns in an “already tight” market, Citi analyst P.J. Juvekar raised his earnings per share estimates for North American fertilizer companies by an average of 60 per cent for 2022 and 175 per cent for 2023.
“Urea prices are up 24 per cent year-to-date, [Di-ammonium Phosphate] is up 33 per cent and Potash is up 14 per cent,” he said. “We are raising base-case estimates on fertilizer names on extended high-price environment and stress-test our models for bull/bear scenarios.”
“Generally speaking, our base case estimates assumes NPK prices at least 30 per cent higher year-over-year in 2022, with prices falling slightly towards the second half of the year. We see some normalization occurring in 2023, but still to remain at elevated levels over FY2021 (Urea up 13 per cent, DAP up 22 per cent, Potash up 46 per cent). We assign this scenario a 60-per-cent probability.”
With his earnings model adjustments, Mr. Juvekar hiked his target price for stocks in his coverage universe.
In order of preference, his changes are:
* Nutrien Ltd. ( “buy”) to US$126 from US$89. The average on the Street is US$96.81.
“Nutrien recently announced their intent to increase their potash production by 1 million tons to 15 million tons per year, capitalizing on the tight supply & export scenario,” he said. “We expect these tons to hit in the back half of the year and conservatively estimate 2022 sales volumes of 14.5 million tons. We raise our FY22 EPS estimates on the updated pricing scenarios (with a lag/adjustment to spot prices). FY23-24 estimates go up on higher forecast prices.”
He added: “Our Buy rating on the shares reflects:1) Segment diversification by fertilizer, and large exposure to the historically stable nitrogen fertilizer industry. 2) Retail segment, which provides additional earnings stability against the more cyclical fertilizer segments. The Retail segment continues to be an area of growth for NTR, especially its online platform. 3) Emphasis on shareholder return through both dividends and share repurchases. Management has proven itself to be effective capital decision makers, and has successfully executed and integrated M&A as well.”