Nutrien Ltd.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Nutrien Ltd. is a leading global provider of crop inputs and services, producing and distributing potash, nitrogen, and phosphate fertilizers, as well as offering agricultural retail services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Nutrien operates in two primary segments: Potash and Nitrogen are the two main segments for production while Retail segment distributes all products along with other services.

Potash: Nutrien is the world’s largest producer of potash, a key component in fertilizers. They have large, high-quality deposits in Saskatchewan, Canada, and are a major supplier to global markets. Potash is essential for crop growth and yield.
Nitrogen: Nutrien is the third-largest producer of nitrogen, a primary nutrient in fertilizers derived from natural gas, and also makes ammonia. Nitrogen is a core component of agriculture. Nitrogen can be produced by ammonia plants with Natural Gas.
Retail: Nutrien has an extensive global retail network, offering a broad range of agricultural products and services. This includes fertilizers, seeds, crop protection products, and precision agriculture technologies.

Competitive Landscape

The fertilizer industry is a global business, marked by intense competition among major players. Key competitors include:

For Potash: Uralkali (Russia), Belaruskali (Belarus), ICL (Israel), and others.
For Nitrogen: CF Industries, Yara, and others.

Nutrien differentiates itself by being a diversified player, with production capabilities in potash and nitrogen and a large global retail network. This diversification provides some stability in the face of fluctuating commodity prices.

What Makes Nutrien Different?

Diversified Production Portfolio: Nutrien is one of the only companies that produces both potash and nitrogen.
Global Scale: Being the largest potash producer, and being a major player in nitrogen production, enables Nutrien to benefit from economies of scale and logistics.
Large Retail Network: Nutrien operates the largest ag retail business in the world, providing access to distribution channels and direct contact to the farming community.

Moat Analysis

Rating: 3/5
Explanation:
- Economies of Scale: Nutrien benefits from economies of scale in potash production due to their vast deposits and operations in Saskatchewan which allows for more efficiency in distribution. This creates some cost advantages that are difficult for smaller competitors to match. The sheer size of the Retail network creates purchasing advantages as well, which further enhances profitablility.
- Barriers to Entry: The potash industry has high barriers to entry due to the limited amount of quality reserves and the high costs of extraction and production. This provides some protection for incumbents like Nutrien. The retail side also has some barriers to entry because it takes time to develop and expand a distribution network and customer base.
- Switching Costs: Although the fertilizers themselves are difficult to differentiate, and switching costs are low, the total system of delivery and service which Nutrien provides creates some loyalty from customers, thus making them less willing to switch vendors. Moreover, many farmers want to get their fertilizer supply in a timely manner which means local distribution and reliability is key, which large players like Nutrien can more easily deliver on than smaller players.
Weakness:
- Commodity Pricing: Prices for fertilizers are highly volatile, and companies have very little to no control over this. Prices are susceptible to many factors including weather patterns, energy prices, and global trade issues. Since prices can change drastically at a short time, it could be difficult for companies to generate consistent returns on investment.

Legitimate Risks to the Moat

Several factors could erode Nutrien’s competitive advantages:

Price Volatility: Fluctuations in fertilizer prices can significantly impact Nutrien’s revenues and profitability, even if ROIC is higher than its competitors.
New Entrants: While rare, new entrants into the potash and nitrogen markets are always a risk, as new technology can change the landscape in the long term.
Technological Disruption: Although unlikely, improvements in agricultural technology or alternative nutrients could reduce the demand for traditional fertilizers, and therefore threaten the company’s economics.
Geopolitical Risks: The business is susceptible to political, climate, and economic conditions in different parts of the globe.
Changing Customer Preferences: There could be trends in farming away from traditional fertilizer.

Business Resilience

Diversification: Nutrien mitigates risks from price volatility through geographic diversification, diversification in products, and diversification in business models.
Long-term Demand: The long-term demand for fertilizers is likely to increase, because of the need to increase agricultural production, due to increasing global population.
High-Quality Assets: The company possesses high-quality and well-located mines that allow the company to be able to compete with other competitors.

Financials In-Depth

Revenues:
- Nutrien’s revenues are closely tied to fertilizer prices and crop demand. As can be seen from exhibits below, prices and profitability can change drastically based on outside conditions, which makes forecasting difficult.
- The business is somewhat seasonal, with peak sales occurring during planting seasons.
- Retail is more stable than Nutrien’s production business.
Margins:
- The company has relatively low margins, due to high volatility in fertilizer prices and input costs, which also leads to volatility in profitability. The company tries to offset this with cost-savings and scale advantages.
- Margins on the retail side are more stable and predictable, but are still susceptible to demand.
Financial Health:
Rating: 4/5
- Nutrien has a solid balance sheet and consistently generates healthy cash flows.
- The debt burden is moderate and can be easily repaid by free cash flow. However, at times of economic instability, leverage could increase.
- The current and quick ratio is healthy.

Recent Concerns and Management Response

Market Volatility: The company experienced lower margins and volatility in fertilizer prices. It seems this is part of the business cycle, and can be remedied as prices for the products go back up.
Geopolitical Conflicts: The company experienced disruptions due to the Ukraine war, but management has indicated that the long-term impact is minimal.
Supply Chain Issues: Management has been doing a good job of keeping supply chains well managed to avoid bottlenecks.

Understandability Rating

Rating: 2/5
Justification:
- Although, the basic business model of selling fertilizers to farmers is easy to grasp, understanding the intricacies of the fertilizer markets, pricing dynamics, and global economic factors is more difficult.
- The company has two main business segments which each have their own unique drivers which makes understanding the company more complicated.

Here is additional data from the company, in exhibits, to see more into the situation of the business. I added the following from different annual and quarterly reports.

Exhibit 1: This Exhibit contains the summary of revenue from 2016-2023 divided by major business segments: Potash, Nitrogen, Retail, and other. As we can see, the revenue of the different segments differ significantly each year, based on pricing and product availability. We can see that retail has slowly grown as a portion of revenue throughout the years. The nitrogen and potash revenue can vary year-to-year based on pricing.

	2016	2017	2018	2019	2020	2021	2022	2023
Potash	$4,238	$3,510	$3,504	$3,066	$2,956	$3,192	$6,545	$5,422
Nitrogen	$2,984	$3,199	$3,928	$3,591	$3,282	$4,117	$8,395	$5,176
Retail	$11,006	$13,855	$15,340	$15,721	$15,166	$16,400	$18,357	$17,745
Other	$1,277	$924	$1,073	$1,332	$1,141	$1,641	$3,191	$1,712
Total	$19,505	$21,488	$23,845	$23,690	$22,545	$25,350	$36,488	$30,055

Exhibit 2: This Exhibit shows the net earnings for the company, which shows how the business is quite cyclical in nature and depends heavily on market conditions. The years 2022 and 2023 were abnormal years because of the rise in fertilizer prices.

	2016	2017	2018	2019	2020	2021	2022	2023
Net Earnings(USD million)	$246	$376	-$17	$890	$357	$3,157	$7,675	$1,506

Exhibit 3: This exhibit shows return on invested capital (ROIC) for the company. As you can see the ROIC has improved quite drastically in recent years, but is highly tied to the business cycle and prices. As with earnings, the ROIC has been higher in recent times due to higher margins, but this does not mean it will persist.

	2016	2017	2018	2019	2020	2021	2022	2023
ROIC	2.7%	3.8%	1.9%	5.7%	3.0%	12.9%	28.6%	13.1%

Exhibit 4: This exhibit shows the debt to capitalization ratios, which show how much debt is used relative to overall company valuation. Since the company has a healthy ratio below .5, we can conclude that the company is doing relatively well in this aspect.

	2016	2017	2018	2019	2020	2021	2022	2023
Debt to Cap	0.25	0.31	0.32	0.30	0.29	0.25	0.36	0.36

Exhibit 5: This exhibit shows the current and quick ratios. Both of these metrics give a glimpse into the financial health of the company and how easily it can cover its current liabilities. A score of 1.0 or above is generally considered good.

	2016	2017	2018	2019	2020	2021	2022	2023
Current ratio	1.30	1.33	1.53	1.43	1.45	1.49	1.20	1.16
Quick ratio	1.05	1.04	1.13	1.02	1.07	1.06	0.91	0.86

In summary, while Nutrien is a large and diversified player in the fertilizer industry with some competitive advantages, the business is ultimately susceptible to the highly cyclical nature of commodity markets, which make the company a relatively average investment.