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Morningstar | Raising Our Nutrien FVEs on Higher Near-Term Fertilizer Profit Outlook

Nutrien reported strong second-quarter results driven by increased fertilizer profits and a rebound in retail sales after weather-related delays to the planting season weighed on first-quarter results. In its earnings release, management increased its adjusted EBITDA guidance from $3.3 billion-$3.7 billion to $3.7 billion-$4.0 billion. We forecast Nutrien to generate adjusted EBITDA of $3.8 billion in 2018. Having raised our near-term profit outlook, we are increasing our Nutrien fair value estimates to $61 per share from $58 and to CAD 79 per share from CAD 76. Our narrow moat rating is intact.

In the retail business, adjusted EBITDA grew 17% year on year during the second quarter to $889 million. North American weather-related delays to the planting season that occurred during the first quarter reversed during the second quarter. Even so, adjusted EBITDA still grew 10% during the first half of the year compared with 2017 as the retail business benefited from selling a greater proportion of proprietary products in its seeds and crop protection product lines. We expect Nutrien will continue expanding its share of proprietary product sales and forecast that the retail business will be able to increase profits as a result.

In the potash segment, adjusted EBITDA grew 32% year on year to $386 million on higher prices and volume as well as lower unit costs. Nutrien has accelerated the optimization of its potash production, and we expect lower unit production costs in 2018 and 2019. Our potash price forecast is unchanged. We continue to forecast the 2018 price to average $270 per metric ton. We also maintain our long-term potash price forecast of $270 per metric ton in real terms as we see supply and demand staying fairly stable in a midcycle environment.

In the nitrogen segment, adjusted EBITDA grew 29% year on year to $335 million on a pro forma basis. This was driven by higher volume and lower costs, partially offset by slightly lower prices. During the quarter, Nutrien benefited from low-cost North American natural gas prices falling faster than nitrogen prices. The company sources roughly a third of its natural gas from Canada. Because of natural gas transportation constraints in Canada, prices have fallen by a greater magnitude than U.S. natural gas prices have, which has increased Nutrien's profits.