Nutrien Ltd

Nutrien Ltd (TSX: NTR) is the world's largest fertilizer producer by capacity. It produces three main crop nutrients--nitrogen, potash, and phosphate--although its main focus is potash, where it is the global leader in installed capacity with roughly 20% share. 

Why Should Investors Book Profit?

• Weak liquidity profile: In Q2 2021, the company's quick ratio was 0.91x compared to the industry median of 1.47x, while the current ratio stood at 1.40x against the industry median of 2.12x. These lower ratios against the industry indicates that the company's short-term obligations are growing faster than its resources to cover them, which is not a good indication.
• Stretched valuations: NTR shares are available at an NTM EV/EBITDA multiple of 7.0x compared to the industry (Basic Material) median of 5.0x, while on NTM Price/ Cash Flow multiple, it is trading at 7.6x compared to the industry median of 4.4x. This implies that the shares are overvalued against the industry.
• Long cash cycle days: The company is holding higher Cash Cycle (Days) compared to the industry, implying the company takes more days to convert its inventory to cash. Currently, its Cash Cycle is at 127.5 days against the industry median of 76.5 days.
• Trading above the upper band of Bolinger Band: Recently, the stock witnessed a healthy rally on the daily price chart and has moved above the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to Sales 

Stock recommendation

For the second quarter and first half of 2021, the firm posted record earnings across the board, demonstrating distinct competitive advantages as well as excellent operating performance. However, compared to the industry median, its liquidity ratios are lower, and its cash cycle days are longer, indicating a negative liquidity profile. Furthermore, several valuation parameters show that the company is trading at stretched valuations. Moreover, the technical signal implies that the stock may be overbought and due for a price correction or consolidation. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 84.91 on October 1, 2021. 

Imperial Oil

Imperial Oil (TSX: IMO) is one of Canada's largest integrated oil companies, focusing on upstream operations, petroleum refining operations, and the marketing of petroleum products.

Why Should Investors Book Profit?

• Increasing uncertainties: The resurgence of Delta variant cases has raised a lot of questions, and it might have an influence on the company's operations and cash flows as the government may tighten some mandatory lockdowns to combat the spread. This could create a volatility in the price and demand of the crude oil.
• Lower margin profile v/s Industry: In Q2 2021, the company failed on maintaining its pace and witnessed lower performance across operating margin matrix against the industry, which exhibits the pressure on company.
• Stretched valuations: IMO shares are available at an NTM EV/EBITDA multiple of 4.5x compared to the industry (energy) average of 2.8x, while on NTM Price/ Cash Flow multiple, it is trading at 5.4x compared to the industry average of 3.1x. This implies that the shares are overvalued against the industry.
• Exhausted technical indicators: Recently, the stock witnessed a healthy rally on the daily price chart and has moved above the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation. Furthermore, the momentum oscillator RSI (14-Period) is trading at ~76.97 levels, which also indicates that the stock is in overbought zone and there is a deep possibility of price consolidation or correction.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): Price to Cash Flow

The continued strength in commodity prices helped the company in second quarter to report strong operating result. The group clocked cash flow from operating activities of CAD 852 million, after investing CAD 259 million in exploration and development activities. However, the resurgence in delta variant cases, on the other hand, is creating a lot of uncertainty, and it might have an impact on the company's operations and cash flows. Furthermore, the company's operating margins are on lower side, indicating a weak liquidity profile, and on a contrarian side it is trading on stretched valuations. Moreover, the technical indicator suggests that stock is perhaps overbought and due for a price correction or a consolidation. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 41.04 on October 1, 2021.

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.