Terra Industries: Powerful Growth in the Strong Agri-Chemical Sector

Terra Industries, Inc. (TRA) is a manufacturer of nitrogen products serving the agricultural and industrial markets in the US, United Kingdom, and Canada. Despite the long-term success of this stock, some are still shocked to find it's still cheap despite just hitting a new 52-week high. First let’s go over the fundamentals of a company that is repurchasing an additional 10 million shares of its outstanding common stock.

First off, year over year EPS has grown 999%, 650%, 500%, 185% and 169% the past five quarters respectively, making it one of the fastest growing companies out there. To go along with this incredible EPS growth, sales growth has been fantastic with sales growth of 26%, 32%, 28%, 27%, 15% and 22% the past six quarters. These numbers are fantastic and are the reason mutual funds have embraced this company.

Fund ownership has grown from 139 to 201 to 249 to 258 funds over the past four quarters. This growth now gives funds 25% of the ownership of the stock. Banks also own 16% of the stock according to Investors Business Daily (see chart below).

With debt at only 53% of shares outstanding, and with a return on equity of 46%, it seems hard to believe a stock like this can be cheap. But it is.

The P/E ratio is only 12 which is in the very low end of its historical 5-year range of 8 to 66. Take this cheap stock with a cash flow of $4.04 per share and EPS in the most recent quarter of $1.80 and you have a cheap, winning stock that should continue to reward investors on every pullback or breakout.

Investors Business Daily gives the stock great ratings with an EPS rating of 73, a Relative Strength rating of 98, a Group RS rating of 98, an SMR rating of A, an Acc/Dis rating of B+, a Composite rating of 98, a Timeliness rating of A and a sponsorship rating of C.

This stock is part of the Chemicals-Fertilizer group which is filled with other strong performers like MOS, SQM, POT, CF and YARIY.PK. This is a stock and a group I definitely want to go long on any pullback.

Just remember, this stock still has not split so for those that think it is too parabolic you are probably still too early. It is cheap and there are no excessive splits that come with a stock that is ready to top.

Disclosure: Long TRA.

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Comments

[Tim Plaehn:]

Although I like TRA a lot and feel there still is some room for increased earnings, this is a classic cyclical which is the reason for the PE range. Remember from your investment basics, cyclicals have peaked when the PE reaches its low and is ready to run up when the PE is highest.

My hope is that TRA management uses the current excessive cash flow to buy back shares and pay some dividends to enhance shareholder value. The earnings growth is almost 100% price driven, no new capacity is being added, and at some time prices will level of not fall. Nature of the fertilizer business.

2008 Jul 31 09:03 AM

[J.B.:]

Thanks for a great and thorough analysis Joshua. I might have to go out and buy this stock. Sounds really good.

2008 Jul 31 02:07 PM

[Urbane Gori...:]

I've been very happy with the recent spike in TRA, but I am a little concerned about the Nitrogen story in a longer run. From what I've read, nitrogen based fertilizers are less prized than potash based (and this may be the reason why POT is selling its nitrogen fertilizer division) and it is used primarily here in the US for corn. **If** ethanol takes a dive (for all the obvious reasons.. and there are articles discussing the closure and uncompleted ethanol factories recently), that may indicate a drop in value of these types of fertilizers and a move to POT and the like.

Annnnd... before anyone calls me a moron, or complete idiot (as seems to be the writing style lately..), the above are just comments and I am still riding my two week 20% profit to the bank....

jegan ;-)

2008 Jul 31 02:53 PM

[Jake2:]

Old news. The Ag story has been going on for over a year.

2008 Aug 01 01:31 AM

[xander:]

co plans to replace the fertilizer it is importing [ a portion of its sales] with production from a mothballed plant, thereby raising its margins. don't know how much that will help.

2008 Aug 01 05:08 AM