Strong unemployment numbers out of the U.S. and Canada have driven renewed investor confidence. Maybe a recession isn’t in the cards after all! This seems to be what the market is telling us. Yet I wonder whether this will hold, as many risks remain. Thus, a TSX stock like Nutrien (TSX:NTR) is one that I think is worth buying right now. Defensive and undervalued, it’s the ideal stock for the times.
The TSX Index is only 6% lower than its all-time high. This means that many stocks are overvalued with much downside if and when the economy falters. Here’s why Nutrien is the next TSX stock I’m buying.
The macro environment remains bullish
Nutrien is the world’s largest provider of crop inputs and services. For example, it supplies potash, which is a fertilizer that helps increase crop yields and resist disease. It’s just one of a handful of products that Nutrien’s global supply chain provides to help “feed the world.”
Unfortunately, Nutrien is at the mercy of the typical ups and downs of commodity cycles. In fact, grain and crop inputs have been highly cyclical, with many years of lacklustre performance. The good news is that, more recently, supply constraints have led to the lowest grain inventory levels in more than 25 years. Inventory levels of fertilizers like potash are also low.
So, what does this mean for Nutrien and its stock price? Well, it’s really quite simple, and we can go back to basic economic theory to understand the implications of this. In any commodity market, the price that these commodities trade at is a function of supply and demand. Prices rise on high demand and low supply. Conversely, prices fall on low demand and high supply.
At this point in time, Nutrien’s products are seeing sustained long-term demand with record low supply. This is causing prices to steadily rise. In my view, it will mean more strength in 2023 and beyond.
Nutrien is an undervalued and underappreciated TSX stock
Part of the deal of commodities is that they are often very volatile. This, of course, has been the case for Nutrien’s crop inputs. After prices soared in 2022, they proceeded to weaken, and, today, they remain weaker. So, it’s been a rough and volatile ride for all involved.
But I think it’s important to keep our eyes on the long term. On the demand side, the driving force behind the increased demand for Nutrien’s products is the growing global population. This will continue to translate into growing demand for grain, fertilizer, and crop protection products. On the supply side, as I said, supply constraints continue and inventories are at 25-year lows.
As for Nutrien, earnings per share (EPS) in 2023 is expected to be between $8.45 and $10.35. The mid-point of this is $9.40. This represents a 51% increase versus 2021. As you can see, I’m ignoring 2022 in my analysis of long-term growth trends. This is because 2022 was an outlier year, as the war in Ukraine and the sharp spike in natural gas prices led to unsustainably strong prices for Nutrien’s crop inputs and grains.
Nutrien’s stock price trades at 10 times the mid-point of management’s 2023 estimated EPS. Clearly, this is a TSX stock that has valuation on its side as well as long-term macro fundamentals.