Terra Nitrogen Company LP (TNH, Financial) is a subsidiary of CF Industries (CF, Financial) and a producer of nitrogen fertilizer products. The company’s principal products are anhydrous ammonia and urea ammonium nitrate solutions (UAN).
In recent years, the company has been under pressure as sales have declined by close to 30% since 2011. However, while Terra Nitrogen operates in the much needed agriculture sector, the stock consistently pays out 10% a year in dividends, making it one of my favorite trades.
Quick look
- Revenue: $563 million
- Income: $286 million
- Div rate: 11.52
- Yield: 10.97%
- Market cap: $1.9 billion
- 52-week high: $137.50
- 52-week low: $84.12
Assessment
The world population is growing, and the demand for food will continue to increase. Terra is a cyclical business, and with the price off 21% since this time last year, the stock could pose a valuable asset going into the end of this election cycle.
On April 1, the company announced that all ammonia and UAN units at its Verdigris, Okla. manufacturing facility are operating. This was following a month-long outage.
I wouldn’t call this stock a growth stock, it's more of a cigar butt trade. I do think you’ll get 100% return in the next five to 10 years through high dividends and a bump in the price multiple.
Over the last decade, the book value has risen 132%, yet the price to book sits at very low levels. Again, P/B seems like a more intelligent way to view the stock considering that the company is owned by CF Industries and will not be looking to scale into new markets or buy new bolt-on companies directly.
Thus, investors can buy TNH for 10% dividend at a price that is lower than its intrinsic value. In the last 10 years, TNH has earned (after taxes) $3.2 billion. The current market value is $1.9 billion.
So, while the rising demand for agricultural products, particularly wheat, corn and rice combined with lower natural gas prices (an input for the fertilizer business) should promote the profitability of Terra Nitrogen, the real reason to own the stock is recession. If you’re in the camp that says a bear market is coming down the pipeline, and while the tide will surely come in on most ships, the agriculture industry will continue to survive and grow, making it a safe haven for investors.
The economics of the fertilizer industry suggest growth in the 3% to 4% range during the next five to 10 years. The Centre for European Policy Studies has an excellent brief on the market.
Conclusion
If TNH produces the same amount of earnings it does today in five years, I’d be shocked. I think we’re going to see a rise in food related commodities in the next few years, and Terra will see the dividend payout rise along with the share price and multiple. In fact, I think this is a better buy than CF as a whole, which recently split. A $100 price jump would not be unlikely with TNH.
Guru positions
Jim Simons (Trades, Portfolio) is the only guru in TNH and has just a small amount of stock with 29,159 shares.
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