Terra Nitrogen Co. Terra Nitrogen Co.: The Quest for 12%
by Craig Walters
The Rude Awakening
Wall Street, New York
Tuesday, November 8, 2005 Craig Walters discusses the largest producer of urea ammonium nitrate in the world, the Terra Nitrogen Co. ------------------------- - Urea ammonium nitrate is not a chemical weapon...nor
is it a homeopathic dietary supplement...any guesses?
- Fertile profits, what a simple soil company has to
offer you...besides green lawn and,
- What can lending this man four minutes a week do for
your back pocket?
------------------------- Joel Bowman, reporting from the thick of a cold snap in
Baltimore... After featuring a Canadian trust you can, well, trust in
yesterday's column, the venue for investment opportunities
has shifted back over the border. Today you'll read about
another fine company that is feeding the food we eat, from
the Central and Southern Plains to the Corn Belt. While some investors are looking down their noses at this
one, Craig Walters sees some potential that you may not
have read about anywhere else. Without further adieu... --- Advertisement --- Secret Canadian Government Program Is Making Some Americans
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program, Federal Canadian Law requires that you get paid. Click here to learn how to get in right away: http://www.agora-inc.com/reports/TWP/WTWPFA22 ------------------------- THE QUEST FOR 12%
By Craig Walters Urea ammonium nitrate is not a chemical weapon...nor is it
a homeopathic dietary supplement. It is North America's
most versatile nitrogen fertilizer...and Terra Nitrogen Co.
L.P., manufactures more of it than anyone else in the
world. Over the last couple of years, as fertilizer prices have
been climbing, Terra has been producing robust profits. And
Terra has been sharing its success with shareholders by
paying out very large dividends. Therefore, at the stock's
current price of $23.73, its trailing 12-month dividend
yield has been more than 10%. But despite the company's recent strong performance and
lavish dividend payouts, the stock has fallen out of favor.
Many investors now consider this debt-free, high-yielding
stock to be overly risky. I don't. I think the stock's
risks are exaggerated. But I like that the stock has fallen
out of favor - that give us a great bargain opportunity.
Despite it ominous name, Terra produces nitrogen fertilizer
products that are purchased mostly by farmers to improve
the yield and quality of their crops. And...that's it. It doesn't get much simpler than that.
That's its business. Terra sells its products primarily in the Central and
Southern Plains and Corn Belt regions of the United States,
placing production very close to its end users. Sign Up for The Rude Awakening Start your mornings off with a dose of Rude news. The Rude Awakening is dedicated to highlighting phenomena in the financial markets that others may not see. Let the Wall Street Journal and the New York Times "break news." Sign up FREE Today! We will not share your email address with anyone else, period.
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Terra Nitrogen Co.: The Upsode of Fertilizer
All of Terra's sales are at the wholesale level. Its
customers are exactly as you would expect - national farm
retailers, distributors, and traders. An important point to
note is that no single customer accounts for more than 10%
of sales. So there's no risk of losing a huge percentage of
business all at once.As you might imagine, the fertilizer business is literally
seasonal. Its sales and cash flows follow the planting,
growing, and harvesting cycles of farmers. Not
surprisingly, therefore, Terra's earnings results are also
seasonal – highest in the spring, decreasing in the summer,
and increasing again in the fall. You'll notice that pattern a little bit in the table below. 
Like many manufacturers, Terra is exposed to several
industry-specific risks: 1) Price fluctuations in natural gas. The threat of rising
natural gas prices is the biggest single risk for Terra.
(And the recent spike in natural gas prices is the biggest
single reason why Terra's stock price has fallen). Natural
gas accounts for 65% of Terra's production costs.
Obviously, therefore, the price of natural gas wields a
very large influence over the economics of fertilizer
production. And when natural gas soars, as it has done
recently, Terra's profit margins contract...or disappear
completely. I know what you're thinking - This company's major raw
material has been rocketing in price, and you want me to
invest in this? Yes, is the answer, as I will explain
below. The company often hedges itself against sharp
increases in the gas price. In fact, it had executed large
hedges in 2004 and into this year. But currently, it has
hedged only about 12% of natural gas requirements over the
next 12 months. 2) Weather and planting conditions. Farmer demand for
fertilizer fluctuates from year to year, based on weather
and planting conditions. Some conditions can increase
demand for fertilize. By contrast, large deviations from
"normal" conditions can reduce demand. 3) Amount of fertilizers (and types) imported by the United
States. Traditionally, the U.S. has been both an importer
and exporter of fertilizers. Potash, for one, is a resource
that requires almost total importation into this country.
Phosphates, on the other hand, we mostly export, with China
being a major customer. As far as Terra is concerned, the
U.S. imports and exports nitrogen, although we generally
end up buying more from overseas than we can produce. 4) Current and projected grain inventories and prices. Need
for increased or decreased crop yields will affect Terra's
sales. 5) Government policies. Federal incentives may increase the
quantity of acres planted, grain inventory levels, and the
mix of crops planted. Terra Nitrogen Co.: The Right Number of Nitrogen Suppliers Back in the mid-1990s, the lure of high gross margins
ushered in a lot of players into the nitrogen fertilizer
business...too many players. Predictably, fertilizer prices
fell to unprofitable levels. There was simply not enough
demand to warrant the influx of suppliers. Many
manufacturers had no choice but to close up their plants
and exit the business. Today, the manufacturers who remain
are arguably the "right" number of nitrogen suppliers. But
fertilizer production is still a very difficult and
cyclical business. After all, nitrogen fertilizers are commodity products. So
to be the most competitive supplier, you have to be able to
get natural gas at the lowest price. Many suppliers have
access to natural gas at a fixed price, but transportation
costs to certain foreign markets make them uncompetitive.
Some are very competitive most of the time in many types of
markets. Others have to shut down operations when natural
gas prices get too high. The best time for all nitrogen
producers is when demand is so high for fertilizer that
they can pass any increase in natural gas prices on to the
customer. This is exactly the situation that has prevailed
throughout most of the last 18 months. And demand for
fertilizer remains very strong. The legacy left by the closings of many nitrogen producers
in the late 1990s through 2002 was one of high demand
versus available supplies. Worldwide nitrogen supplies are
still not abundant, and that obviously plays into Terra's
hands. Another factor in Terra's favor is the relatively
weak dollar, which keeps international competitors - many
with access to cheaper natural gas - from over exporting
into the U.S. This is a time of very favorable product pricing for Terra.
So its profits for the third quarter of 2005 were up
substantially - $17.7 million compared to $6.8 million in
last year's third quarter. Unfortunately, the company is
feeling the squeeze of rising natural gas prices and is
predicting a small loss for the final quarter of the year.
At the same time, the company states that, effective
September 30, it began taking fresh steps to protect itself
against a continuing rise in natural gas prices. Terra pays out quarterly distributions based on 'Available
Cash' levels for the quarter. Available Cash is defined as
all cash receipts less all cash disbursements, adjusted for
changes in certain reserves. Obviously, therefore, Terra's
fourth quarter dividend won't bring much holiday cheer. But
these low expectations for the near-term are exactly what
allows us to buy the stock for the long-term. Terra is forever and always a company that earns its money
and pays its dividends in uneven lumps. Over a longer
timeframe, however, I think this company will continue to
reward its investors with nice dividend payouts. I also like the fact that Terra has a rock-solid balance
sheet. It has almost no debt. It spends nothing on research
and development and very little on capital expenditures. Terra's stock is just plain cheap. And I think it's cheap
because of the market's perception of Terra's natural gas
risk. However, I think this perception is offering us a
real bargain. [Joel's Note: So concludes day two and, indeed, investment
idea number two from Craig Walters. From Canada to the Corn
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body vibrated," seems an enticing enough prospect to coax
any adventure seeking editor to the outskirts of
Pennsylvania civilization. "Fire in the hole!" shouted our guide and explosives
expert. Read on in your weekend edition to find out what
happened when the detonator was struck... Also in your
Weekend Rude Edition: an update on the storming of Capitol
Hill and the week of Rude Reading, neatly organized for you
to peruse at your leisure. Be on the lookout tomorrow and remember to pen me your
thoughts here at aussiejoel@the-rude-awakening.com In the meantime, head to your Rude website for all the
information you need at www.the-rude-awakening.com Cheers, jOEL And the Markets... | Thursday | Wednesday | This week | Year-to-Date | DOW | 10,720 | 10,675 | 189 | -0.6% | S&P | 1,243 | 1,231 | 23 | 2.5% | NASDAQ | 2,220 | 2,188 | 51 | 2.1% | 10-year Treasury | 4.46 | 4.48 | -21.00 | 4.42 | 30-year Treasury | 4.65 | 4.67 | -21.00 | 4.60 | Russell 2000 | 667 | 655 | 9 | 2.4% | Gold | $486.45 | $478.90 | $29.45 | 11.2% | Silver | $8.08 | $8.02 | $0.54 | 18.6% | CRB | 313.21 | 315.31 | -5.56 | 10.3% | WTI NYMEX CRUDE | $56.52 | $57.77 | -$4.06 | 30.1% | Yen (YEN/USD) | JPY 118.72 | JPY 119.10 | -0.42 | -15.7% | Dollar (USD/EUR) | $1.1758 | $1.1674 | 66 | 13.3% | Dollar (USD/GBP) | $1.7195 | $1.7172 | 322 | 10.4% |
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