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Summary

  • Current price of RNF yields at least 20% upside.
  • RNF's profit margin seems to be starting to rise.
  • RTK, RNF's parent, seems to be growing stronger.

Rentech Nitrogen Partners L.P. (NYSE:RNF) is a nitrogen fertilizer MLP (master limited partnership) that is approximately 60% owned by Rentech (NASDAQ:RTK). Rentech Nitrogen has plunged after climbing to a peak just below $48 in February of 2013. Its IPO was priced at $20 per unit (or share), and shares opened at $20.20 on November 4, 2011. With shares currently at $17.15, is the stock a buy? How does it stack up to the competition?

Rentech, which stands for Renewable Energy Technology, was formed in 1981 to develop and commercialize synthetic fuel technologies. After acquiring a methanol plant to convert natural gas to liquids and building coal-to-liquids plants, it agreed to provide 13 airlines with synthetic diesel for ground services at Los Angeles International Airport. Seeing that its biofuels business was losing money, Rentech changed its focus from biofuels to wood pellets production in 2013. This change has helped decrease the company's net income loss from -$14.0 million to -$1.5 million in 2012 and 2013 respectively. Analysts estimate the company will report a profit in the next quarter. Forward PE is 36.

As fellow Seeking Alpha contributor Chris Damas noted, Rentech entered into the nitrogen fertilizer business in 2006 when it acquired an ammonia nitrogen fertilizer factory in East Dubuque, Illinois from Royster-Clark for $63 million. By 2006, Royster was a part of Agrium (NYSE:AGU). In 2011, Rentech spun off its nitrogen fertilizer business as Rentech Nitrogen Partners.

A strong parent company is good news for RNF. One concern holding down shares of RNF was that RTK would sell shares of RNF if it needed to. If RTK is profitable, this threat would be eliminated.

RTK and RNF have almost matched each others' prices until recently. Does this mean RNF is undervalued?

Source: Yahoo Finance

In November of 2012, RNF acquired Agrifos LLC, which owned a synthetic granulated ammonium sulfate fertilizer plant in Pasadena, Texas, for $158 million. Agrifos LLC was the third largest ammonium sulfate fertilizer producer in North America at that time. The acquisition expanded RNF's market to Brazil, which is the largest consumer of ammonium sulfate fertilizer is the world. Due to Brazil's current drought conditions, I expect fertilizer shipments to increase as farmers there try to catch up.

Revenue has been climbing each year, but profit margin has fallen. But as the quarterly graph shows, profit margin seems to have hit a bottom and is heading up. The company expects operating and financial results to improve in 2014.

Source: Google Finance

The company competes with two other MLPs in the nitrogen/ammonia fertilizer business: Terra Nitrogen (NYSE:TNH) and CVR Partners (NYSE:UAN).

RNF

TNH

UAN

Market Cap ($million)

666.96

2630

1390

Price/Cash

17.89

23.09

16.18

Price/Debt

2.08

0.00

10.97

Price/Assets

1.51

6.73

2.35

Price/Sales

2.10

3.83

4.28

Price/Book

26.08

9.18

3.21

Forward PE

10.09

--

14.58

PEG

0.79

--

4.31

Price/Revenue

2.16

3.81

4.31

Gross Margin (%)

20.25

66.02

48.90

Profit Margin (%)

2.20

63.60

34.40

Operating Margin (%)

13.10

37.70

32.40

Revenue Growth (%)

-5.50

-20.70

-1.30

Return on Assets (%)

1.50

74.80

17.40

Return on Equity (%)

13.30

99.00

23.60

Sales Growth (%)

19.00

-5.60

7.10

Current Ratio

1.20

4.13

3.81

EV/Revenue

3.08

3.66

4.42

EV/EBITDA

17.10

5.46

10.37

Inst. Ownership (%)

12.30

5.70

5.40

Inst. Trading (%)

-16.47

-0.57

-5.22

Insider Ownership (%)

60.01

75.07

70.23

Insider Trading (%)

8.36

--

13.45

Short Interest (%)

5.08

0.37

0.71

Short Change (%)

-10.08

2.27

-10.08

Numbers from Yahoo Finance and Finviz.com

From the comparisons, RNF looks cheap based on valuation. And if we assume that the PEG should be 1, shares should be trading at $21.71, a 26.6% upside. Short sellers are covering, and insiders are buying, which means they also think the stock could rise.

In conclusion, RNF still has some work to do to catch up with competition. But current price presents a nice valuation with at least 20% upside.

Disclosure: The author is long RNF, TNH. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Rentech Nitrogen Is A Buy With At Least 20% Upside