Scotia Capital analyst Ben Isaacson expects weakness in shares of Nutrien Ltd. in the near term, pointing to “the end of the super-cycle, and soon, the end of peak cycle P+K pricing too.”
Accordingly, he downgraded the Saskatoon-based company’s shares to “sector perform” from “sector outperform” after it third-quarter EBITDA missed his expectation by 30 per cent (US$2.5-billion versus US$3.6-billion) and its guidance was reduced “materially.”
“While we really don’t like to change our stock recommendations frequently, we believe it’s warranted in what’s been a weird and volatile ag/fert year,” said Mr. Isaacson. “We see no choice but to downgrade NTR back to Sector Perform.
“First, the main reason for our upgrade in the summer was due to a nitrogen bull thesis that has now vanished. Back then, EU gas was approximately $60/mmbtu, or double the $30 gas that ammonia was pricing in at the time (and still is). This week, EU gas was $25. Second, the sector rotation into ags/ferts as a hiding place from other sectors has also faded, as the fert downturn is in full gear, while other sectors are certainly closer to finding a floor. Third, potash price and demand erosion are moving much faster than we had anticipated. We knew potash volume would be weak in Brazil, but we didn’t expect NA volume to be the lowest since ‘09! Wow. What hasn’t changed is a compelling valuation story. We’ll have more on valuation tomorrow, but in short, we struggle to see what will close the valuation gap near-term.”
The analyst maintained a US$110 target for Nutrien shares. The average on the Street is US$110.05.