Terra Industries, Inc. (TRA)

LEGMAKER (< 20) Submitted: 5/11/08 10:34 PM : Start Price: $43.60 TRA Score: -34.45

It is difficult to speak about TRA without giving information on TNH. The two are intertwined in a relationship where TRA owns approximately 75% of TNH. It works out the TNH is more of a distribution company as they have a very large dividend. The dividend is set on 25% of one nitrogen fertilizer plant. This dividend will continue to be high, but TRA has more upside as their distribution agreement had been derived on TNH being able to pay out a certain amount to its shareholder's and this was a base set in their agreement. These terms are set to change as TNH no longer has any difficulty making this payment as the proverbial gravy train is rolling. With TRA set to get more revenues from this agreement, it looks as though they will be crushing current estimates and that these estimates are horribly low as to the standards set by analysts. If you would like more concise information with respect to the change check their 10-K filing ... More It is difficult to speak about TRA without giving information on TNH. The two are intertwined in a relationship where TRA owns approximately 75% of TNH. It works out the TNH is more of a distribution company as they have a very large dividend. The dividend is set on 25% of one nitrogen fertilizer plant. This dividend will continue to be high, but TRA has more upside as their distribution agreement had been derived on TNH being able to pay out a certain amount to its shareholder's and this was a base set in their agreement. These terms are set to change as TNH no longer has any difficulty making this payment as the proverbial gravy train is rolling. With TRA set to get more revenues from this agreement, it looks as though they will be crushing current estimates and that these estimates are horribly low as to the standards set by analysts. If you would like more concise information with respect to the change check their 10-K filing statements. These changes could happen as soon as this coming quarter.





It also seems that estimates have been low in this sector anyway. Many analysts and investors are discounted the use of fertilizer going forward which has knocked down many of the values of this sector. What is not understood is that internationally, farmers would line up for hours just to get one bag, and if United State's usage is lower, it will just go to emerging markets that can make money on much smaller profits than here. There are also some countries putting a huge tax on fertilizer and food exports which will also increase demand abroad. You think there is demand for the Iphone, just wait and see what happens when people go hungry, these are the types of things that can make a government topple.





Getting to TRA, we see that their stock has dropped over 20% in recent months as they are having trouble with getting past the stock price around 50. Their forward PE of 9.65 not only is inexpensive, but could be a point where a blowout occurs. The farm report this month could be what drives it, if not it is a must own before next earnings. They have beaten the Street's consensus for the last three quarters and the next two quarters look to be something the company can crush. Even more peculiar is the revenue and earnings estimates for next year. Fertilizer pricing has been relatively consistent for years and now it looks for a larger breakout. Commodity bull runs on average last 14 years, this means that we are only about half way done. If this holds true we should still see escalating prices over that period. With sales growth estimated at a mere 17% this quarter and nitrogen pricing increase over 50% it seems this company is priced quite low with respect to demand. They also produce methanol which is a key component for gasoline which should see pricing increases going forward.





First quarter results were quite good. Operating income was up 150%. North American revenues were up 40%. Pricing increases with respect to agricultural chemicals were up anywhere from 37% to 54%. Inventory draw downs of wheat should stimulate pricing further with respect to nitrogen applications. This is important as weather not only has shortened the corn season, but the late frost destroyed some of the corn crop which can be converted to wheat. There should be a decrease in natural gas costs in the second and third quarter as they have placed hedges. It is also important to remember that they should be able to increase revenues through their UK project called GrowHow and most of their products are sold the year before as customers try to hedge costs, which should not decrease sales volumes as much as expected.





The current chart is still bearish with a trend to $30, so I would wait until the stock breaks out. I believe you can buy this stock at $45 short term, or now long term on any dip as AGU's earnings pushed the stock up on May 2nd. 2008 earnings, I believe, will be around $5.29 per share this year. This should generate a price target for the full year of $74 at a PE of 14. I believe after the pullback this is more than achievable barring any surprises with respect to costs. Look for the stock to reach $45 by the end of the quarter.

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