By Fani Kelesidou
There is much talk around fertilizer producers these days. The sector attracts investors' interest as fertilizers' sales volumes are expected to surge next year. Weather-related conditions, especially in the U.S., resulted in bottom-low crop yields. Crop nutrient demand has historically multiplied in years following droughts. Higher crop prices and the resulting increase in acreage are the main drivers of growers' demand for fertilizers.
Rentech Nitrogen Partners, L.P. (RNF) is one of the companies which are going to gain from the above mentioned conditions. Operating since 1965, Rentech is a nitrogen fertilizer company formed by Rentech, Inc. as a publicly traded master limited partnership. The company has an average ammonia production capacity of more than 830 tons per day and plans to increase it to 1,022 tons. The company's competitive advantage lies on its strategic position. Rentech's primary facilities are placed in East Dubuque, Illinois, the core of the nitrogen fertilizer market. Combined with the low level of gas prices - a key feedstock to nitrogen production - RNF's growth prospects are compelling.
Rentech holds a strong financial position supported by solid operating cash flows. Based on the latest financial statement, RNF's revenue of $70.6 million was reduced by about 6 percent compared to the same period in 2011. This decrease in revenue was mainly attributed to the fact that favorable weather conditions allowed farmers to apply spring ammonia earlier than usual. Consequently, a portion of ammonia volumes deliveries expected to occur in Q2 2012, were shifted to the first quarter. However, the drop in revenue was largely offset by an increase in ammonia and UAN prices by 9 and 21 percent, respectively. In addition, for Q2 2012, Rentech generated operating income of $41.6 million, up by 15.8 percent from the comparable period in 2011. During the second quarter of 2012, net income was $41.2 million or $1.08 per unit. The company increased guidance for full-year of 2012. Cash available for distribution is estimated to be in excess of $126 million or $3.30 per unit. Overall, current ratio stands at 3.23, which is impressive when compared to the industry's average same ratio. Long-term to equity ratio of 0.17 is perfectly manageable.
EPS this year %
Gross Profit Margin
Data derived from Finviz.
Fundamentally, RNF has many advantages. It is evident from the table above that Rentech exceeds its competitors in terms of profitability and management efficiency. RNF's performance reveals sound financial discipline, as well as more than adequate cash-generating ability. For the period from 2009 to 2011, RNF's revenue grew by an average rate of 36.88 percent. For the same period, free cash flow year-over-year increased by the impressive average rate of 675.21 percent. The main question that arises after witnessing such high growth rates is whether the company has reached its peak. Analysts are generally bullish about RNF's future EPS growth. Earnings growth potential is primary justified by the company's ammonia capacity expansion and its strategic position at the forefront of the nitrogen market.
Stock Performance and Valuation Metrics
Technically, Rentech Nitrogen looks strong. Throughout 2012, RNF has performed outstandingly by returning more than 110 percent and outperforming its peers, as well as, the S&P 500. Currently, the stock is priced at around $37, about 8 percent below its 52-week range of $40. Compared to its peers' valuation metrics, Rentech could be considered a little bit pricey. The P/E ratio stands at 18.48, while forward P/E ratio is 11.74. The stock is trading 6 times sales with a PEG ratio above the norm of 1. However, what makes RNF an attractive investment is its dividend yield. RNF yields the highest within the industry. Its last dividend payment indicated a yield of 12.41 percent. The company has enough cash-generating capacity to keep the current yield.
2013 is expected to be a strong year for Rentech. There are early market indicators of increased nitrogen products prices from which RNF is well-positioned to benefit. In addition to the positive market outlook, the relatively low gas prices are going to boost revenues for the remainder of 2012 and 2013. The company has already started to sell ammonia for the next planting season at rates way above the 2012 median of $730 per ton. Last but not least, RNF's deliveries are not affected by the low Mississippi river levels. The company does not rely on barge routes for shipping its products. Most of its customers are within 200 mile distance from the facilities. Therefore, deliveries to its core market, the Corn Belt, will not be blocked by barge traffic.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: EfsInvestment is a team of analysts. This article was written by Fani Kelesidou, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.