Terra Nitrogen is Ready to Rise
Helen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Over the course of the past several years that were marked by the rise of commodities as the leading asset class, few industries offered the returns available from agriculture companies like Agrium (NYSE: AGU), CF Industries Holdings (NYSE: CF), Potash Corp. of Saskatchewan (NYSE: POT) and the Mosaic Company (NYSE: MOS). While the industry remains strong, the returns available from the largest players may be muted by comparison to some of the up-and-comers. Terra Nitrogen (NYSE: TNH) is one such company that offers an attractive balance between a very aggressive dividend and solid long-term profit potential. If and when a U.S. crisis hits, farming will become of even greater importance and the nation is forced to look inside itself for sustenance. These companies may produce some of the least pleasant smelling products, but their profits and future prospects will leave you holding your nose all the way to the bank.
A recent screen of the market designed to identify high dividend yielding stocks that also have significant cash balances on the books, found that Terra Nitrogen ranked highly amongst all market participants. In addition to the above limiting criteria, to make the cut, companies needed high levels of profitability based on both margins and return on equity. While the fact that Terra Nitrogen made the cut is not dispositive, it is a strong sign that the company is well positioned to perform, not only in the short-term, but over the longer-term. Within the context of crisis-proofing one’s portfolio, the high cash balance is attractive because it suggests that the company will be able to operate in lean times, as well as during times of prosperity. Interestingly, the five companies that were revealed by the screen described above were in the basic materials sector. What this suggests is that this sector continues to be attractive as well as cash-rich. The amassing of large quantities of cash could signal that any of these companies may be on the cusp of significant expansion, but, in all likelihood, it is more a sign of their financial health.
Population projections suggest that by the year 2040, there will be roughly nine billion mouths to feed on the planet. In order to keep all of those people fed, current food production will have to increase by roughly 70% over the course of the same period. What this means is that the use of effective fertilizers will become increasingly important. The majority of top-rated farm land is already in use, meaning that the growth in food production will have to come from less desirable land. This means that less than ideal land will employ fertilizer to become more productive. This is an inevitability, not a guess or a projection. The world will need more food and fertilizer is the only way to make the dirt in which crops will need to be grown capable of getting the job done. The International Fertilizer Industry Association predicts that consumption of fertilizer will experience a double digit increase by 2016.
In terms of timing, the decline in food prices coupled with the ongoing challenges facing Europe has decreased demand from farmers. This has caused a precipitous fall in the prices of most fertilizer stocks. While the short-term prospect may seem unclear, given the unavoidable longer-term reality, this selloff should be seen as a buying opportunity, particularly for Terra Nitrogen. The benefit to the company is twofold: first, the decreased price increases the stock’s profit potential, and second, the lower entry price gives an investor the ability lock-in a dividend yield that is even more attractive.
While most of the companies in Terra’s peer group offer modest dividend yields, Terra is currently trading with a dividend yield of 7.6%. To place this in the proper context Agrium has a dividend yield of 0.5%, CF Industries has a dividend yield of 0.9%, Potash has a dividend yield of 1.3% and Mosaic has a dividend yield of 1.0%. The income component of Terra is an important element and allows the company to stand out from its peers on this basis. When coupled with the growth potential, the stock is attractive.
On a valuation basis, Terra has a trailing twelve month price-to-earnings (P/E) ratio of 15.2 relative to 10.9 for Mosaic, 9.8 for Agrium, 7.8 for CF Industries and 13.2 for Potash. The fact that the company does not represent the same value proposition as its much larger competitors is not a great surprise and is not sufficient reason to pass on the stock; there are many compelling reasons why the stock is expensive. Over the longer-term, the stock is expected to be a strong performer and justify its valuation. Additionally, in this particular context, we are looking for companies that are likely to protect you should the economy face serious jeopardy. Given the outlook for this industry, this is a perfect sleeper company.
Another criteria which gives a solid indication of the efficiency and overall appeal of a stock is its operating margin. Terra has an impressive operating margin of 63.9% relative to 14.1% for Agrium, 24.2% for Mosaic, 44.8% for CF Industries and 45.6% for Potash. Even against these well-established powerhouses, Terra seems to be firing on all cylinders and poised for success. Given the nature of fertilizer there are at least a few dozen references that could be made, but instead of slogging through....well, you see the point. This is a growth industry that has taken a short breather. It is poised for a serious comeback and Terra may be the hidden gem that can lead the way now, in the future and in the case that the fertilizer hits the fan (this last one was too good to pass up, just like this stock).
QueenBC has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.