Terra Industries: An Interesting Fertilizer Play

A few months ago I wrote several articles about the relationship between Terra Nitrogen L.P. (TNH) and Terra Industries (TRA) concerning the earnings and dividends of Terra Nitrogen. You can see the articles here, here and here. For background, until the last quarterly dividend, TNH had a deficit of accumulated minimum dividends to work off. As of the last dividend, the deficit had been repaid and TRA was then entitled to about 44% of TNH’s earnings before dividends were paid to shareholders.

I warned that unsuspecting TNH unit holders may not get the payout they were expecting. This quarter's results vividly show that outcome. Here are the comparative results for the two quarters:

First quarter 2008:

• Revenue: $174.5 million
• Net income: $81.6 million
• Dividend: $4.20 per unit

Second quarter 2008:

• Revenues: $256.7 million
• Net income: $130.2 million
• Net allocated to common units: $74.2 million
• Dividend: $3.63

As you can see, net income increased by $48.6 million and the amount paid out as dividends decreased by $7.4 million. The recent $3.63 dividend still gives a robust 12.9% yield on the current ($112) share price, but it is probably a disappointment to those who bought at $164 in April without checking into the partnership details or reading this blog. Going forward, any hit on profitability will hit double hard on the payout to common unit holders. One other item from the figures above: I am truly impressed at the 51% profit margin! These people are minting money at their current pricing levels.

I added TNH to this site’s portfolios in Nov 2007 at about $102 and dropped it at the end of April 2008 at $144 in favor of Terra Industries. Terra also owns about 75% of TNH, so TRA shareholders reap the majority of the benefit of TNH’s profitability. Another issue I found with TNH units was the volatility of share prices around earnings and dividend release. It is not uncommon for the share price to fall 4 to 5 times the dividend as the ex-div date approaches. Finally, TNH earns from the production of a single fertilizer plant and has been running at 100% capacity. The only upside TNH has is through pricing, there will be no additional production.

At this point, I definitely prefer TRA over TNH. The company is generating huge amounts of cash with which it is looking for ways to enhance shareholder value. It is buying in shares, starting up a moth-balled ammonia plant and have started paying a small dividend. Terra Industries has earned $2.91 a share for the first 6 months of 2008 and even matching Q2 earnings for Q3 and Q4 put 2008 earnings at $6.80, giving a PE of 7.5 at the current share price. TRA is a component of this site’s Special Opportunities Portfolio. For someone looking for something different (not (POT) in the fertilizer space, TRA deserves a look.

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

Comments

[shark1001:]

Thanks Tim, I always enjoy reading your articles.

2008 Jul 27 08:18 AM

[frankie cooper:]

let's see, you said in your last article about TNH: "the bottom line is that unsuspecting, uninformed shareholders are going to get a nasty surprise when the next dividend is declared."
the number that you gave readers as the "nasty surprise" was 30% LOWER than the declared distribution. what i find HILARIOUS is that you still have the gall to write in your article:"I warned that unsuspecting TNH unit holders may not get the payout they were expecting."
ummmmmmm.....yeah i guess you did warn, but you were WAAAAAAYYYYYYYYY off. i guess 57 cents lower isn't quite as DRAMATIC as the 1.63 you said was going to drop off the distribution. did you think that no one would read your previous articles and call you on your shoddy predictions (or at least fuzzy math)?

a lesson, people: the folks who write these articles are not PROS. take their articles as fact, and try to implement the ideas into your trading/investing and you will get exactly what you paid......nothing. (in this particular case, less than nothing).
many authors write this stuff to inform, but many let self esteem get in the way and the desire to inform morphs into the desire to massage their own egos. i am sure that tim started off with the best of intentions, but he let that desire to "tell-you-so" get in the way and fell FLAT on his face......


better luck next time, tim.

:)

2008 Jul 27 07:13 PM

[marshgerda:]

I think you're being pretty hard on Tim. When he said that TNH's dividend was going to be reduced the stock was at $141. Now it is at $112. I'd say people would have done well to heed his advice, even if he isn't a "pro". And TRA has gone from about $41 to $50 in the same time period. I am long TRA as I think they're in the right spot owning the majority of TNH.

2008 Jul 27 08:51 PM

[frankie cooper:]

"When he said that TNH's dividend was going to be reduced the stock was at $141" - huh? and that is significant because.....???


"Now it is at $112. I'd say people would have done well to heed his advice" - yes, because getting paid out 16% per share REALLY sucks.....

what he did with those prior articles was do a lot of fancy numbers crunching that was WRONG. plain wrong. significantly wrong. the authors deserve praise when they write good stuff, but equally deserve to be chastised when they get it wrong (especially when they are a bit smarmy about it....).

one more thing - that theory about TNH rising considerably into earnings: no longer true. or maybe this qtr is an anomaly.....

2008 Jul 27 09:29 PM

[Richard Col...:]

Thanks for the information Tim. I have TRA long and this is the type of info I want to read.

2008 Jul 27 10:35 PM

[Tim Plaehn:]

If you look at the net income for TNH the dividend would have been about $6 under the old schedule. Instead TRA took $56 million off the top reducing the dividend to $3.63. TNH had their income increase by 50% and the dividend went down, sounds like a good investment to me!

2008 Jul 28 08:18 AM

[fireball:]

TIM hi, i have been considering adding tra. it does look good. i have been holding tnh for some time and have not been disappointed yet. the announced dividend is just over $4. i almost sold tnh two quarters back over a similar article. i dont know if it was yours. i am just reading and learning and guessing and hoping. i think the recent period of pullback in soft and hard commodities is just a healthy adjustment. i do not mind because it seems to be helping everything else i own. with the growing world demand i still believe real assets (food fuel and mining) will do better in the lomg run. my portfolio is well spread but i am beginning to wonder if the diversification is the way to go anymore.

2008 Jul 28 10:49 AM

[Tim Plaehn:]

fireball, At this point, TRA gets about 85% of the income generated by TNH. I do not see the benefit of holding TNH over TRA unless your basis in TNH is very low. I believe TRA will build share holder value faster than TNH. Just my opinion.

Be careful on the assumption that food prices will continue to rise. Crop yields from many parts of the world could increase exponentially with U.S. style technology and methods. China, India, Brazil and Argentina come to mind.

Argentinian farmers can grow 2 crops of soy beans a year and would supply the world of the government there did not want to tax away 95% of the profits. I am currently in Uruguay where soy acreage (hectareage?) of soy has increased 10 fold in 5 years.

I had a neighbor in Sacramento who was a seed scientist and was constantly traveling to China, Mexico, Chile etc. to help them grow the latest in food crops designer made for their soils and climates.

My point is the current food shortage is probably not real, and will definitely (IMO) disappear soon. The good point is modern farm methods require fertilizer, so these companies will do well, just do not expect the recent price increases to continue.

2008 Jul 28 12:11 PM

[spencer pro...:]

Don't play commodities if you want to sleep at night. There are plenty of people speculating on the price of commodities right now. I highly suggest that you stay away from commodities unless you understand the industry. Once should recall that commodities are highly leveraged and thus highly risky. However, i would agree that Dec. corn @ 5.20; Nov Beans @ 1250; & Nat. gas (Jan) @ 10.50 would be safe bets. You could buy before they get to these prices but you would have to be confident in you data, breaking a trend, and the other relative prices... i.e. your spreads. So if you like risk play, otherwise be patient and stick w/ equities.

2008 Jul 29 02:42 PM

[fireball:]

TIM thank you. i will definitely keep what you said in mind. if tnh has a run up as dividend day approaches it might be a good time to make a switch. as far as being a pro. heck after i argued with my broker over buying bhp, ngs, silxf, and io-a little time passed and the next time i called she asked me what i was going to buy next. i got a little tickled but i told her what i was looking at. seems like even the pros are just making their best guess and hoping like the rest of us. i switched to online trading to avoid the heavy commissions.the only thing my broker still holds is bhp. i recently picked up shares of pbr and soon after leaned that they have a fertilizer division. i really like the broad spread of bhp. maybe while pbr is down a little that is a good thing to consider. anyway thanks for a thoughtful answer. as rough as things have been this year it feels like we are all kind of in this thing together and should help when we can.

2008 Jul 30 10:34 AM

[johnthebear:]

Where can you find information of the agreement between the companies on the dividend obligations looking forward?

2008 Jul 30 12:27 PM

[Tim Plaehn:]

John, the partnership agreement is on the Terra website.

2008 Aug 07 10:51 AM

[User 114593:]

Did you giys read it right? He said the share price would fall, 4 to 5 times the dividend price before Ex-div date. Not go up-----or am I missing something here????

2008 Aug 11 05:09 PM

[suhaas:]

Yes, he said that and was partly right,it fell from 112 on July 24, when the dividend was announced, to 106 on the day before ex-div date. I wonder why this happens, though.

2008 Aug 19 06:20 PM

[suhaas:]

However, if you bought TNH and TRA on the day the dividend was annonced and sold on the ex-dividend day, with TNH, you came out even, (after adding the dividend that you got). However, with TRA, you lost more than $3/ per share or more than 6% loss.

2008 Aug 19 06:23 PM

[gana08:]

I bought 500 share of TNH in June for 155.00 per share. Now it's only 102 per share. Should I sell or keep. I am so confuse.....

2008 Aug 20 11:29 AM

[gana08:]

I bought 500 share of TNH in June for 155.00 per share. Now it's only 102 per share. Should I sell or keep. I am so confuse..... Report abuse

2008 Aug 20 11:30 AM

[ForecastS.Com:]

An upswing to retest $122 resistance is probable. But in any event a down swing to $110 is expected in the next several days. Therefore, this is a bearish quick trade of about $10 to $12 in expected profit, depending on where you short it.

It is likely that TNH will dip below $110 to about $106 or somewhat lower, which would make the profit as large as $16 on the short side. However, I'll be conservative and simply be satisfied with a major portion of the short-term down swing, and leave a little on the table.

I also consulted the forecast for TNH provided by ForecastS.com, but the extra interpretation and the target price are also the result of my own review of the price chart for TNH.

2008 Aug 28 05:23 PM

[core777:]

HI Tim

You are over looking items on the same report. you must have missed were TRA plans to buyback TNH once they have purchased 75% of the company. The buy back will be the 90 day moving average which is $130 per or the highest priced payed by the company for the stock which I suspect is north of $150 which ever is higher. this creates a bottom for this stock almost like no other on the market. share that set the bottom for the stock. Tnh would be much higher if it weren't for you articles. The fundimentals of this stock forget about the dividend compared to any other stock of its growth would give it at least a 20 PE bringing it price to $278 per share. I believe it will top $300 per share in the next 12 months. I'am planing on siting back and cashing in while you try to cause us as much pain as possible with your mindless dribble.

Thanks again Tim for the mindless ramblings

2008 Sep 20 12:24 PM