PDCE - Nutrien Announces $2 Billion Share Repurchase - Buyback Wednesdays

Summary

• Canadian fertilizer company Nutrien Ltd. announced a $2 billion share repurchase program on February 15, 2023.
• The repurchase program represents around 5% of Nutrien's market cap at announcement.
• Nutrien's stock has been essentially flat over the last year, outperforming the overall stock market.

Commodity prices rise and fall to their unique set of drums and are often uncorrelated to the stock market, making them both an interesting and challenging asset class. Early in the pandemic, we saw the price of lumber shoot up sharply as people stayed at home and undertook home improvement projects en masse. In early 2022, we saw something similar with wheat prices as Russia invaded the bread basket of Europe. Ukraine accounts for 50% of the world trade in sunflower oil, 15% of corn, 13% of barley, and 10% of the world wheat market.

When food commodity prices rise, we see second-order effects in the rise of input costs, mainly seed, and fertilizer. This story played out in the past with the rise of the BRIC countries (Brazil, Russia, India, and China) in the early 2000s and the corresponding rise in commodity prices. Companies like Intrepid Potash ( IPI ) and Potash Corp Of Saskatchewan that manufactured potash and nitrogen fertilizers saw huge run-ups in their stocks both before and after the 2008-2009 recession, followed by steep subsequent declines during the dead decade for commodities. These stocks have been resurrected from the dead in recent years and remain just as volatile as I remember from the mid-2000s.

Canadian fertilizer company, Nutrien Ltd. ( NTR ) announced a $2 billion share repurchase program on February 15, 2023, representing around 5% of its market cap at announcement. Nutrien is the largest producer of potash and the third largest producer of nitrogen fertilizer in the world. It was formed in 2018 through the merger of Potash Corp and Agrium. The company operates in over 40 countries and serves customers across all major agricultural networks. It also provides customers with complete agriculture solutions including nutrients, crop protection products, seeds, services, and digital tools.

With earnings season in full swing, we saw 20 companies announce buybacks last week, compared to 23 companies announcing share repurchases in the prior week.

Cheap Valuation

Nutrien is valued at an EV/EBITDA of just over 4 and is the cheapest it has been since 2018. Commodity investors are very well aware of the cyclical nature of most commodities and how these stocks often appear cheapest at their cyclical peaks.

Just like virgin value investors that are yet to experience their first value trap, management teams also often find these cheap stocks irresistible and launch buybacks at exactly the point in the cycle when they should be conversing cash for the inevitable downturn. This is not to say that we are currently at a peak for fertilizer stocks. The peaks often become clear in hindsight. Being aware of this dynamic helps explain why the stock might be cheap and why management is interested in reducing the size of the pie through buybacks.

Buyback Announcements followed by Actual Buybacks

Nutrien has a history of keeping its promises when it comes to buybacks. In February '22, Nutrien announced a huge buyback of $4.28 billion. Following this announcement, the company bought back its shares, reducing its outstanding share count by approximately 27 million. The company purchased more than 150 million shares since the beginning of 2018, reducing its number of shares outstanding by approximately 23%. So at Nutrien, we see actual buying following buyback announcements.

2022 Results

Discussing the 2022 performance of the company, Ken Seitz, the CFO, stated,

' Geopolitical events, most notably the war between Russia and Ukraine contributed to significant supply disruptions across agriculture, energy, and fertilizer markets. The supply shocks were most pronounced for global fertilizer markets leading to higher prices, increased volatility, and major shifts in buying patterns throughout the year. Nutrien delivered record earnings and cash flow in this environment due to the advantages of our world-class production, distribution, and retail network. '

Nutrien ended 2022 with total cash and short-term investments of $901 million compared to $499 million at the end of Q4, 2021.

Financials

Even before the war in Ukraine, Nutrien started seeing a big jump in revenue with revenue up 34% in 2021 to $26.86 billion and then rising once again to $37 billion in 2022. Unfortunately, analysts don't expect the good times to continue and Nutrien's revenue is expected to slow down over the next 3 years by approximately 5% per year. Net income, which jumped from $992 million in 2019 to $7.66 billion last year is also expected to decline in the next three years. The company has a leveraged balance sheet with $10 billion in net debt after taking pension obligations into account but excluding capital leases.

The Bottom Line

Commodity prices are highly volatile and can fluctuate based on several factors ranging from changes in weather, global economic conditions, and supply and demand imbalances. They help strike a balance between supply and demand, so once high prices have stabilized the market, prices come down as was the case late last year. Because of this fluctuation, investors fear another super cycle in the near future. This could be a red flag for fertilizer companies including Nutrien.

The graphs above indicate a low stock-to-usage ratio which means the demand for these commodities far outpaces supply. While oilseed stocks are at the lowest in the 5-year range, grain stocks are at the lowest in nearly 12 years.

Nutrien's stock has been essentially flat over the last year, outperforming the overall stock market. Over a 5-year period, the stock is up nearly 58%. The company trades at a forward PE of 7.3 and a forward EV/EBITDA of 5.3. For investors that don't see inflation coming down anytime soon and expect commodity prices to remain elevated, Nutrien might be worth taking a closer look at.

The companies in the list below are the ones that announced the most significant buybacks as a percentage of their market caps. They are not the largest buybacks in absolute dollar terms. A word of caution. Some of these companies could be low-volume small-cap or micro-cap stocks with a market cap below $2 billion.

Top 5 Stock Buyback Announcements

1. Helix Energy Solutions Group, Inc. ( HLX ): $8.54

On February 20, 2023, the Board of Directors of this offshore energy services company, authorized a new $200 million share repurchase program, equal to 17.3% of its market cap at announcement.

2. PDC Energy, Inc. ( PDCE ): $61.70

On February 16, 2023, the Board of Directors of this domestic independent exploration and production company, approved a $750 million additional share repurchase program equal to 12.4% of its market cap at announcement.

3. Tri Pointe Homes, Inc. ( TPH ): $23.11

On February 21, 2023, the Board of Directors of this home builder, authorized a new share repurchase program of up to $250 million of its common stock, equal to 10.5% of its market cap at announcement.

4. Healthcare Services Group, Inc. ( HCSG ): $14.47

On February 15, 2023, the Board of Directors of this provider of professional housekeeping, laundry and dietary services authorized a new repurchase of 7.5 million shares of company's Class A common stock, equal to 10% of its market cap at announcement.

5. Twilio Inc. ( TWLO ): $66.49

On February 15, 2023, the Board of Directors of this cloud communications platform provider authorized a new $1 billion stock buyback program, representing around 8.2% of its market cap at announcement.

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