In the spring, I wrote very bullish articles about Rentech Nitrogen Partners (RNF). I wrote an article on April 27th titled "40 Dollars A Share Is Realistic" and I wrote an article on May 15th after Dahlman Rose downgraded the fertilizer stock sector, reasoning that there was "No True Reason To Sell Your Fertilizer Stocks."
2012 Proj. Earnings
On September 30th, here are the current values:
2012 Proj. Earnings
Note: The numbers for RNF include earnings from 2011, and those distributions were paid in 2012.
As the numbers looked from April, it was obvious that RNF was undervalued compared to UAN and TNH. RNF has increased to the $40 price point I had for it, and they have also been able to take advantage of the continued increase in fertilizer prices and lower costs of natural gas, which have boosted their earnings and distribution estimates for 2012. There is limited information available for 2013, but with a new DEF facility and increased ammonia capacity expansion that will probably be worked during their 2013 outage, there is earnings growth potential. However, with the outage in 2013, and other factors (slow increase in natural gas prices, and some settling in the prices of fertilizer), I find it hard to match over $3 a share earnings reported for 2013. MSN has an earnings estimate of $2.97 for 2013, which is probably realistic with the information we have now. Only 4 analysts provide estimates, and the range is extreme, from $2.18-$3.69.
UAN's price is sitting right where it was 5 months ago. However, it has taken a rocky ride all the way down to about $20 a share, and has bounced back nicely. UAN has a plant outage here in 2012, which will have about a 25 cent a share hit on the earnings and distributions for this year. For 2013, UAN will be producing 3,000 tons of UAN a day, up from 2,025 tons currently, according to this report. They expect the expansion and the conversion to all UAN to net an extra 200 million a year, or about 25 cents a share. Using current numbers, this should mean about $2.25 a share for 2013 for UAN. UAN uses pet coke, not natural gas as the feedstock, and they have hedged long term purchases of pet coke. Forward PE for 2013 would be about 12.
Information for TNH is much harder to come by. Using earnings so far in 2012, I would project them to be around $16.50 a share with distributions expected to be close to $15.50 a share. I have contacted Terra Nitrogen to try to receive some forward guidance, but I have not heard back.
Looking forward to 2013 - these are my projections for each of the three stocks based on the limited guidance available:
2012 Proj. Distributions
2013 Proj. Distributions
I believe that RNF will increase earnings/distributions with the DEF plan in 2013, but they will have a similar decrease due to a plant outage. I believe Terra Nitrogen has a plant outage this year which may decrease Q4 earnings this year or Q1 earnings next year. As mentioned above, they expect a 25 cent per share hit for their outage this year, then an additional 25 cents next year from plant expansion and another 25 cents from no planned outage, so I would expect an increase to $2.25 a share.
Conclusion: I was very bullish for the fertilizer sector, especially RNF in my previous articles. I believe now that RNF is not a buy, and maybe a hold at best. There are many articles lately on various sites that state that RNF pays 12-13% yields based on one quarter of a variable distribution. I believe that it may be a shock for many novice investors when they see 4th quarter distributions drop for both RNF and UAN, and most likely TNH, and the stock prices will drop. Also looking at forward yields for 2013, currently UAN has RNF and TNH beat by about 1.5%, with a forward yield of 8.57%.
If you own RNF currently, I would consider profit taking. I would also hold out until 4th quarter earnings to buy into these stocks, as I believe that lower distributions will drive some people away from these solid stocks.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.