Value stocks are stocks that are out of favour. There’s always a reason for these stocks being out of favour, but the trick is to buy those that won’t stay that way much longer. This is where Nutrien (TSX: NTR) comes in. Nutrien is trading below what it was trading at in 2018. Is this underperformance warranted for Nutrien stock, or is there a strong opportunity to buy it?
Let’s take a look at three reason to buy it today.
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Strong secular trends
It’s easy to understand why a stock like Nutrien does not garner much excitement. Compared to the hot tech stocks of the day, Nutrien is boring and unimpressive. But what if this is exactly what is setting it up for outsized returns in the future?
Nutrien is the world’s largest provider of crop inputs and services. In reality, this is actually an exciting and necessary business. For example, Nutrien 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.”
Supporting Nutrien’s business, we need look no further than the growing global population. This will continue to translate into growing demand for grain, fertilizer, and crop protection products. In fact, 2024 experienced record global potash consumption. If we add the supply side to this equation, the story becomes even more optimistic. Inventories remain at or below historical levels, with limited growth in capacity expected.
Nutrien takes action
In response to difficult market conditions over the years, Nutrien has embarked on a mission to increase earnings and cash flow from the inside out. This means focusing on finding cost savings opportunities as well as on operational efficiencies. Last year, management set a goal to achieve $200 million in cost savings. This goal will be reached by 2025, which is one year ahead of the target. This will flow through to the company’s earnings and cash flows.
In addition to this, Nutrien is refocusing its spending on projects that have low execution risk. This means that the company will benefit from its unique opportunity to expand sales of potash and nitrogen with limited capital investment.
Finally, management is targeting share buybacks these days, as they believe that Nutrien stock is undervalued. As an aside, Nutrien’s dividend per share has grown 35% since 2018 and the stock has a dividend yield of 4.66%
Nutrien stock’s low valuation
Lastly, I’d like to draw your attention to the fact that Nutrien stock is cheap, currently trading at 18 times this year’s earnings and below book value. Times have undoubtedly been hard for the company, but given the positive trends as well as the actions that are being taken by management, there’s hope for the future.
The bottom line
It’s never easy to buy into value stocks. This is because these stocks reflect a business that’s struggling with industry and/or company-specific issues. As a result, the shares are trading at low valuations as expectations are often unrealistically low.
But these are the times where it pays most to invest. Nutrien stock is completely out of favour as the company continues to struggle with the cyclicality of its industry. I have a bullish view on the stock because, in my view, the industry and the company are setting up for better times ahead.
