Seth Goldstein: In scanning our coverage for undervalued stocks, we highlight narrow-moat Nutrien. Nutrien was formed in 2018 via the merger of Potash Corporation and Agrium.
Nutrien sells the three primary fertilizers--potash, nitrogen, and phosphate--which combine to generate half of its profits. The company is the largest producer of potash fertilizer in the world based on production capacity. The other half of Nutrien's profits come from its agricultural retail business, which is the largest in the world with over 1,700 stores.
Our narrow-moat rating for Nutrien stems from the company's geologically advantaged potash production assets in Canada, which give Nutrien a cost advantage over its competitors. Additionally, Nutrien's nitrogen fertilizer production benefits from low-cost North American natural gas feedstock. The company also enjoys a transportation cost advantage by producing nitrogen in close proximity to its customers in the northwestern U.S. and Canada.
Although potash prices have been volatile in recent years, we forecast global potash prices to stay around $300 per metric ton over the long term as potash demand grows roughly in line with new supply. However, as Nutrien reduces costs by closing higher cost potash mines, we forecast the company's gross margins to expand roughly 900 basis points, driving potash segment profits 75% higher by 2028.
With shares currently trading in 4-star territory at a discount to our $68 per share fair value estimate, we see attractive risk-adjusted upside potential for the stock.