Accelerated Efficiency And Expanded Potash And Nitrogen Output Will Strengthen Future Operations

Key Takeaways

• Accelerated operational efficiency and strategic sales expansion may enhance margins and boost revenue without significant new capital expenditure.
  
• Growth driven by proprietary offerings, network optimization, and strategic acquisitions supports retail earnings, while capital allocation aims to maximize free cash flow per share.
  
• Softening commodity prices, geopolitical risks, and weather disruptions may hinder Nutrien's revenue growth and margins despite production efforts.

Catalysts

Provides crop inputs and services.

• Nutrien has accelerated its timeline for achieving $200 million in operational efficiency and cost savings by 2025, one year earlier than planned, which can enhance net margins.
  
• The company is set to expand its production and sales of potash and nitrogen without significant capital expenditure, aiming to increase upstream sales volumes by 2-3 million tonnes by 2026, potentially boosting revenue.
  
• Nutrien is optimizing capital expenditures to a range of $2 billion to $2.1 billion by 2025, leading to structural improvements in earnings and free cash flow.
  
• The growth strategy includes increasing proprietary product offerings, network optimization, and tuck-in acquisitions, which are vital for sustaining retail earnings growth.
  
• Countercyclical capital allocation towards growth projects and share repurchases is aimed at maximizing free cash flow per share, potentially raising earnings per share.

Nutrien Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Nutrien's revenue will grow by 2.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 5.1% in 3 years time.
• Analysts expect earnings to reach $1.4 billion (and earnings per share of $2.63) by about February 2028, up from $733.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $2.1 billion in earnings, and the most bearish expecting $1.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.0x on those 2028 earnings, down from 33.9x today. This future PE is greater than the current PE for the US Chemicals industry at 23.6x.
• Analysts expect the number of shares outstanding to decline by 0.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.22%, as per the Simply Wall St company report.

Nutrien Future Earnings Per Share Growth

Risks

• Prolonged recovery in Brazil and softening North American ag-commodity prices could hinder Nutrien’s downstream retail business growth, potentially affecting revenue and net margins.
  
• Weather-related disruptions, such as wet weather impacting North American sales volumes and dry conditions affecting Brazil operations, pose risks to consistent earnings and revenue growth.
  
• Lower potash benchmark prices and nitrogen prices, combined with extended turn-arounds and outages, might lead to reduced earnings despite efforts to increase production volumes.
  
• The possibility of geopolitical disruptions, such as trade flow imbalances and rising global supply chain costs, could impact the ability to maintain competitive pricing and affect net margins.
  
• The risk of increasing global capacity and supply tightness not meeting growing demand might suppress pricing power, which can adversely influence revenue growth and earnings.

Valuation

• The analysts have a consensus price target of CA$78.342 for Nutrien based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$97.32, and the most bearish reporting a price target of just CA$53.16.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $27.2 billion, earnings will come to $1.4 billion, and it would be trading on a PE ratio of 24.0x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of CA$71.92, the analyst price target of CA$78.34 is 8.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.