Fertilizer stocks have been on a tear as crop prices have surged and investors fear the global potash inventory crunch could get worse in the wake of Russia’s attack on Ukraine.

As the world’s biggest potash producer, Nutrien Ltd. could have a chance to capitalize on growth opportunities in the market, but analysts agree it could take time for that to materialize.

“They do have a large amount of idle potash capacity they could bring to market that they have not done yet. The thing is, it will require them to hire a bunch more people and get some new equipment,” said Steven Hansen, managing director and equity analyst at Raymond James, in a phone interview.

“[Nutrien is], really, the only player that has idle or excess capacity still available globally. So they will play a really important role in, I'll say, backfilling with the supply that's been taken out of the market in the eastern hemisphere.”

Hansen said he thinks Nutrien will eventually reveal a plan to bring on that excess production capacity, given that the market needs it.

While Canada was the largest producer of potash by country in 2020, at roughly 32 per cent of global supply, according to data from Natural Resources Canada, Russia and Belarus were the second- and third-largest producers at 20 per cent and 17.6 per cent, respectively.

As companies and governments around the world isolate Russia and, to a lesser extent, Belarus for Russian President Vladimir Putin’s invasion of Ukraine, concerns have been growing about how that will impact the two countries’ potash production – potentially giving Nutrien an opportunity to step in and gain market share.

BMO Capital Markets Analyst Joel Jackson estimated it could take a year for Nutrien to bring on new supply in Saskatchewan because of the time it takes to hire new workers and get mines up and running again. In an email, he said the company might be waiting to gauge the extent of the production loss from Russia and Belarus before revealing a plan to bring more supply online.

However, even prior to the Ukraine invasion, fundamentals in the potash market were improving as Belarus was experiencing export challenges. As well, crop prices, which tend to move in tandem with fertilizer prices, were rising.

'DEEP BENCH'

While Nutrien’s management team assesses these growth prospects, executives are also focused on filling the top job at the company.

Mayo Schmidt abruptly left his roles as president and chief executive in early January, a mere eight months after he was appointed.  

Ken Seitz, who had been serving as head of Nutrien’s potash unit, inherited Schmidt’s duties on an interim basis. A global search is underway for a permanent chief executive.

Hansen and BMO’s Jackson indicated that they don’t see management uncertainty being a hindrance to the company in any way.

“They have a really deep bench of professionals at all the different segments,” Hansen said.

SHARES SURGE

Nutrien shares, which had already been steadily climbing over the past year, have surged more than 30 per cent since Russia’s attack on Ukraine in late February, and rank among the S&P/TSX Composite Index’s top-performing stocks since the invasion on Feb. 24.

The rally has propelled Nutrien beyond Bay Street’s expectations. As of Friday morning, the consensus 12-month price target among analysts tracked by Bloomberg was $130.16, implying a potential negative return of 9.3 per cent.  

David Driscoll, president and chief executive officer of Liberty International Investment Management Inc., said his firm follows a general rule of thumb to sell half of a stock position if it has doubled. Liberty holds Nutrien in client accounts.

He gives the example that if a stock is three per cent of an overall portfolio, he will sell half of the holding if it reaches a six per cent weight so “profits are locked in regardless of what happens next with the stock price.”

In an email on Wednesday, BMO’s Jackson said he believes “we have not seen maximum bullishness yet and commodity prices still rising,” so Nutrien’s stock could continue to move higher, although there could be volatility because of the Ukraine attack and Russian sanctions.

Jackson has an outperform rating (the equivalent of a buy) and a price target of US$120 for Nutrien’s listing on the New York Stock Exchange.

Hansen agreed that Nutrien’s shares could continue to climb despite the fact that the stock is currently trading around his 12-month price target of US$95 per share. He maintained his outperform recommendation.  

“We still think the prospects here are really outstanding,” Hansen said.

“The company is going to be extremely flush with cash in this backdrop, and has already started to undertake a number of different strategic options - buying back stock, raising the dividend and we think [mergers and acquisitions] and rapid expansion will come.”