Compelling Valuation High Distribution Yield: Consider Terra Nitrogen LP

| About: Terra Nitrogen (TNH)

Summary

Income-seeking investors should consider Terra Nitrogen, TNH has no debt at all, very low Enterprise Value/EBITDA ratio, and the current distribution yield is very high yielding about 11%.

Terra will continue to benefit from attractive North American natural gas prices.

The company's gross margin increased in the last quarter to 60.99% compared to 57.66% in the same quarter last year.

I believe that margins will be higher in the fourth quarter due to lower natural gas prices.

In my view, income-seeking investors should consider Terra Nitrogen Company, L.P. (NYSE:TNH). The company has no debt at all, very low Enterprise Value/EBITDA ratio at 5.07, and the current distribution yield is very high yielding about 11%.

Terra Nitrogen Company, L.P. produces nitrogen fertilizer products in the United States. It primarily offers anhydrous ammonia and urea ammonium nitrate solutions for farmers to improve the yield and quality of their crops. The company was founded in 1991 and is based in Deerfield, Illinois.

On November 04, Terra Nitrogen reported its third quarter 2015 financial results. The company reported net earnings of $69.4 million on net sales of $150.2 million for the quarter ended September 30, 2015. This compares to net earnings of $72.0 million on net sales of $135.1 million for the 2014 third quarter. Net earnings allocable to common units was $41.2 million ($2.23 per common unit) and $48.0 million ($2.60 per common unit) for the 2015 and 2014 third quarters, respectively.

Comparing the third quarter of 2015 to 2014

  • Ammonia average selling prices increased by 3 percent and UAN average selling prices decreased by 13 percent;
  • Ammonia sales volume increased by 9 percent and UAN sales volume increased by 27 percent; and
  • Realized natural gas cost per MMBtu decreased by 39 percent.

Gross margin increased in the last quarter to 60.99% compared to 57.66% in the same quarter last year. I believe that margins will be higher in the fourth quarter due to lower natural gas prices.

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Source: Company's repots

TNH declared on November 4, 2015, a cash distribution for the quarter ended September 30, 2015, of $2.81 per common limited partnership unit. According to the company, cash distributions depend on TNH's earnings as well as cash requirements for working capital needs and capital expenditures. For the first nine months of 2015, TNH reported net earnings of $227.7 million on net sales of $430.4 million, and capital expenditures were at $81.9 million for the period. The forward annual distribution yield is very high at 11.09%, and the payout ratio is at 82%. The annual rate of dividend growth over the past three years was negative at -10.4%, but over the past five years was positive at 2.3%, and over the past ten years was very high at 19%.

TNH Dividend Chart

TNH Dividend data by YCharts

Natural Gas Cost

Natural gas, which is the feedstock for Terra Nitrogen's process, represents a primary cost for the company. Terra will continue to benefit from attractive North American natural gas prices. In comparison to feedstock costs in other regions of the world, cheap American natural gas continues to support Terra's higher producing margin. Average purchased natural gas cost in the third quarter was at $2.62 per MMBtu, a 39% lower than the $4.29 per MMBtu average gas cost in the same quarter a year ago. Fourth quarter average Henry Hub natural gas price was even lower at $2.43. Therefore, I believe that fourth quarter earnings will be higher.

Henry Hub Natural Gas February 2016 Leading Contract

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Chart: TradeStation Group, Inc.

Valuation

TNH's stock is down 36% from its 52 week high of $158.70 from February 24, 2015.

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Chart: TradeStation Group, Inc.

Terra Nitrogen has no debt at all, its current ratio is very high at 3.20, and the trailing P/E is very low at 9.49. Furthermore, the Enterprise Value/EBITDA ratio is very low at 5.07.

In addition, TNH's Margins, Efficiency ans Return on Capital parameters have been much better than its industry median, its sector median and the S&P 500 median as shown in the tables below.

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Source: Portfolio123

Ranking

According to Portfolio123's "All-Stars: Greenblatt" ranking system, TNH's stock is ranked first among all 249 basic materials stocks with a market cap greater than $100 million.

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The "All-Stars: Greenblatt" ranking system is taking into account just two factors; Return on Capital and Earnings Yield (E/P) in equal proportions. Back-testing has proved that this ranking system is one of the best free available ranking method. I recommend investors to read Joel Greenblatt's book "The Little Book That Beats the Market", where he thoroughly explains his system.

Summary

In my view, income-seeking investors should consider Terra Nitrogen. The company has no debt at all, very low Enterprise Value/EBITDA ratio at 5.07, and the current distribution yield is very high yielding about 11%. Terra will continue to benefit from attractive North American natural gas prices. The company's gross margin increased in the last quarter to 60.99% compared to 57.66% in the same quarter last year. I believe that margins will be higher in the fourth quarter due to lower natural gas prices. Furthermore, according to Portfolio123's "All-Stars: Greenblatt" ranking system, TNH's stock is ranked first among all 249 basic materials stocks with a market cap greater than $100 million. All these factors bring me to the conclusion that TNH is a smart long-term investment.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.