Published: July 21, 2008
As the prices of agricultural
commodities have risen, so has the demand for fertilizer, much to
the benefit of Terra Nitrogen (NYSE: TNH, $108.24). This Sioux City, Iowa
master limited partnership (MLP) makes and
sells nitrogen fertilizer (anhydrous ammonia and urea ammonium
nitrate (UAN)) to farmers in the central and southern United States.
TNH is 75.3% owned by Terra Industries (NYSE: TRA), which functions
as the general partner and runs TNH's business affairs. Terra
Nitrogen has some 18.7 million shares outstanding, but only about
4.8 million float freely. The rest are held by Terra Industries.
As an MLP, TNH must distribute all available cash after expenses to
the general partners and unit holders. Since August 2007, TNH has
distributed quarterly payments totaling $13.75. That works out to an
annualized yield of 12.7% ($13.75/$108.24). Investors should be
aware, however, that historical distributions have been variable. In
2007, TNH distributed a total of $7.64, but only $1.92 in 2006.
Investors were paid $2.95 in 2005.
With demand for corn greatly increasing because of ethanol
production and wheat trading at multi-year highs, fertilizer demand
has been enormous, causing prices to zoom. In 2003, Terra's
anhydrous ammonia went for $242 a ton. By 2007, the same product
brought $380 a ton, a +57% increase. UAN did even better,
skyrocketing from $97 a ton in 2003 to $195 a ton in 2007 -- a +101%
jump.
Revenues and profits have risen just as dramatically. In 2006, for
example, revenues were $425 million, but increased to $636 million
in 2007. Net profit soared even more, from $46.2 million to nearly
$206 million, a nearly +350% increase! Thanks to this increase,
earnings per share for 2007 came in at $10.90. The one analyst who
covers the partnership estimates TNH will earn $15.50 a share this
year.
So far, sales and earnings for the first quarter are equally
impressive. Sales went from just under $130 million during the 2007
first quarter to $175 million in the same quarter of 2008 -- a gain
of +36.2%. Earnings per share did even better. They increased from
$1.87 in Q1 of '07 to $3.93 in Q1 of '08.
Despite the impressive earnings growth, TNH's story is not without
risks. The shares traded for under $40 in early 2007 and have since
reached as high as $171, so the current pullback could be extended.
Natural-gas prices, well behaved in 2007, have surged in 2008. Since
natural gas accounts for about 65% of costs, this increase has the
potential to crimp Terra Nitrogen's margins.
Still, as long as the demand for corn-based ethanol and wheat are
robust, TNH should do well.
TNH offers a double-digit yield and a chance to surf the wave of
rising food demand. Investors should be aware, however, that the
stock has increased in price over the past couple of
years, and any slackening in demand for fertilizer could lead to a
further pullback in the share price. The stock is suitable for
aggressive investors willing to accept the risk.Good investing!
Carla Pasternak
Editor
High-Yield
Investing
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