Terra Industries Revisited

Back in April I dropped Terra Nitrogen LP (TNH) from my site’s Income Portfolio because my analysis of the partnership agreement would now start paying the lion’s share of the distributable cash to Terra Industries as the General Partner. My belief is that many TNH shareholders are not aware of this fact and will be surprised at the next earnings and dividend announcement. Terra Industries holds 75% of the shares of TNH, so they get the cash either as distributions or as GP.

I decided to take another look at Terra Industries because agricultural products are still a hot industry and Terra is in the fertilizer business. With the growing worldwide need for increased food production, fertilizer production should continue to be a profitable industry. Terra manufactures nitrogen based fertilizer products at 5 plants in North America. They also hold a 50% interest in an ammonia manufacturing plant in Trinidad and Tobago and own 50% of UK fertilizer producer GrowHow UK Ltd. They have deep water terminal assets on the Gulf of Mexico to be able to import or export product as market conditions change.

Financially, earnings have been growing nicely from break-even in 2006 to $2.39 and share in 2007 to a projected $4.34 in 2008. The stock trades at just 16 times 2007 earnings compared to Potash (POT) at a PE of almost 50. Fertilizer is historically a very cyclical business so the investor has to ask himself how long he expect the upswing in agriculture to continue, however, at this point there are no signs of slowing for fertilizer price increases.

At some point, Terra and other fertilizer producers will no longer be able to increase prices, especially if grain prices start to fall. Terra has taken a couple of steps to put the tremendous current cash flow to work that are positive for shareholders in the longer term. First, they have started paying a dividend. They are starting at only a dime a quarter, but still a good sign. The board has also a share buyback of up to 14% of the outstanding float, another opportunity to use cash for investor benefit.

TRA stock is quite volatile and has shown a recent pattern of price run-up prior to the earnings release, then dropping just before or soon after the announcement. These swings can be 20-25%. A buyer of stock should definitely watch the timing of any purchases. You can see in the chart below that TRA (in red) and TNH price changes have been pretty well linked. If investors are disappointed at the next dividend announcement of TNH, there may be a buying opportunity in TRA.

I am adding Terra Nitrogen to my site’s Special Situations Portfolio as an exposure to the agricultural market.

Note: I currently do not have a position in TRA or TNH.

Posted in Categories: Contributor, External Research, Stocks.

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