This stock may come up on a lot of value screens right now because of the high average ROE, historic EPS growth rate and low P/E ratio.
Terra Nitrogen Company (TNH, Financial) produces nitrogen fertilizer products and is an indirect, wholly owned subsidiary of CF Industries (CF, Financial). As stated on its homepage, "Terra Nitrogen Company, L.P. (TNCLP) is a master limited partnership traded on the New York Stock Exchange under the ticker TNH. Its assets consist primarily of a nitrogen manufacturing facility in Verdigris, Oklahoma."
Increasing demand for food products (aka new babies growing up) combined with lower natural gas prices (an input for the fertilizer business) should promote the profitability of companies like Terra Nitrogen and its parent CF Industries.
TNH has the capacity to produce 1.9 million tons (32% nitrogen basis) of urea ammonium nitrate solutions (UAN) annually and 1.1 million tons of ammonia, the basic ingredient for most nitrogen fertilizer and many industrial products.
The average ammonia market price of $615 per metric ton in the first quarter of 2015 and the average UAN market price of $262 per metric ton in the quarter. This has the potential to give the company annual revenue in the $1.1 billion range, yet looking at the drop in year-over-year sales, it's no secret that the company is not operating at maximum capacity.
On April 13, Terra announced the completion of the planned turnaround of an ammonia and UAN plant representing approximately one-half of the production capacity at its Verdigris complex, which took 9 and 11 weeks to upgrade projects to improve the production capacity and efficiency of the units. This is probably baked into the price drop since February.
Fertilizer seems like a good industry to be in, right? We all eat. Farmers need fertilizer to ensure we all eat. The costs of this industry’s products will continue to rise (maybe faster than inflation).
Despite massive growth in the last decade, the company is probably not going to double sales and profits based on productivity even if it has the capacity for it. If the industry trends play out as we have noted above (and barring any serious event in Verdigris), net income should recover –Â back to the $15 to $16 per share range. At a 15 multiple, shareholders would see a $225 price.
TNH is worth at least 50% more, and in the $135 range the stock makes for an excellent opportunity to keep the cash flow dividend payments coming. TNH has paid out $10.40 in the last year and $106 in the last decade. If the stock price stays around this level and you reinvested dividend payments back in for the next decade, you’d own the stock free and clear.
This would be a game plan for the conservative investor, one who needs income. Then, if the stock falls like it did at the end of last year, the savvy investor could get their average dividend rate up to 11% or higher.
There are no guru investors in TNH or CF, and that's probably because it's not a moment stock that will grow past its current plant's max capacity. Yet, if I had $2.5 billion it wouldn't be the worst idea to generate $400 million in free cash flow annually with Terra Nitrogen.
Conclusion — TNH has been stagnant due to plant turnarounds, but Terra Nitrogen runs a very good operation with its profitability outpacing its parent holding company, CF, plus higher return on capital and zero debt. This year should make for a recovery in the stock.
