Terra Industries, Inc. (TRA)

Big special dividend coming up and it looks like CF is hot on the trail to snatch them up for b00-c00 bucks & stock.

7.50 special dividend

I like product line in recovering economy - expect earnings increase and, with that, price appreciation.

People have to eat even during hard times, and with population growth and a limited amount of land to grow food. Agriculture is a great place to invest. The fundamentals on this stock are great right now.

Special Dividend of $7.50 and a continued buyout offer from CF industries.

I always liked Terra, I was finally in a position to pick up a few shares, and what timing.

TRA has declared a special div. coming out in the 4th quarter.

Better yet, CF industries "CF" is making a hostile takeover bid for the stock. If I read correctly they are also giving "TRA" stockholders 0.465 shares of CF for every TRA stock they hold.

Low Natural gas Prices increase margins. Also, DEF starts next year.

It staved off a take over bid last summer.

All movements indicate a large move to the upside as bio-fuels demand increase across all markets worldwide and food production has to increase to feed the people of the world.

Under Valued

The analysis presented is based on a price of $29.07.

TRA is an interesting double play stock. Although it has good value qualities, there are elements of concern. These elements, though are compensated by a merger potential for a stock that looks better from most value perspectives and, if it occurs, provides an additional discount for receiving the acquiring company’s stock in the merger.

The most concerning aspect of this stock is that the EPS is not growing consistently. For the 2001-2008 period, the EPS has been negative in four of those years, however, the two most recent years were far and away TRA’s best. Return on equity has also been spotty, but the most recent two years were 32% and 60%. At least free cash flow has generally been positive, but again, the two most recent years have been stand out performances. In addition, the company holds about $10 per share in cash (34%).

Before I look at the valuations, I look at three indicators of financial safety. For this stock, all three are quite good. The Altman Z is 6.4; below 1.8 is risky, above 3 is the safe range. The Piotroski F is 9; 2 or below indicates caution, while 8 or 9 indicates that the stock is expected to rise within the next year. The Sloan accrual is -2.95; 5 or higher is high risk, while -5 or lower is excellent.

I use more than one valuation method to gauge intrinsic value; two of the first three provide a good margin of safety (MOS). The first three are standards in the valuation literature. The estimate based on Graham’s formula was $249 (88% MOS). The Earnings Power Value (value of the firm) was estimated, on a per share bases, to be $204 (86% MOS). The Discounted Cash Flow (DCF) estimate valued the stock at $38 (24% MOS). I like the DCF to be at least 50%, but the others valuations were quite good.

The last two were based on a spreadsheet found on the AAII website; these are designed to mimic Buffett’s valuation methodology. One is based on projecting EPS growth 10 years into the future based on past EPS growth; I discount the resulting valuation to reflect the price at which the stock will realize a compounded earnings (including dividends when applicable) return of 15%. Based on this method the target purchase needs to be below $59, and at the current price there is a 51% MOS.

The second is based on estimating EPS growth through the sustainable growth rate. The per-share projected book value is estimated by taking the previous year’s book value, adding EPS and subtracting dividends (when applicable). The projected EPS is estimated by multiplying the projected book value by the average Return on Equity, and the projected dividend is estimated by multiplying the projected EPS by the average payout ratio. I then discount the resulting valuation to reflect the price at which the stock will realize a compounded earnings return of 15%. Based on this method the target purchase needs to be below $42, and at the current price there is a 31% MOS

To ascertain that the price is attractive to me, I take one more thing into consideration. At the current price, would I expect an immediate 15% return on my investment (ROI) based on earnings and dividends? In this, the EPS represents about 15.2% of the share price by itself, so the 1.4% dividend yield is not needed. However, if the dividend was needed to achieve the desired 15%, I also consider the risk that the dividend may be cut. This risk is assessed by evaluating several factors (Current Price, Current Yield, Current Payout Factor, Gross Margin, Operating Margin, Financial Leverage, EPS Growth). Based on this assessment, there is a moderate (most recent fiscal year) to moderate (TTM) risk that the dividend may be cut.

The second play is based on a hostile bid from CF. TRA’s board has twice rejected the CF offer, and is also fighting off a hostile bid of its own (from AGU). The current offer is $33.92 which reflects a nearly 17% improvement on $29.07. To see my assessment of CF, see my recommendation there. However, my general assessment is that CF is slightly superior, and if acquired via purchasing TRA, then there will be an additional MOS based on arbitrage.

TRA looks to be a good investment on its own merits, but the merger arbitrage gives it added potential.

Magical Hat Equation

DFA50 APPRICIATED BY ABOUT 12% CAPS=4S

Considering Book value, earnings, and market cap...this should beat the market in 5 years.

The federal goverment will more than likely mandate class 8 vehicles to add a seperate tank and burn urea for emissions control within the next few years.

I've done nicely with TRA's sister company and its high divy. I believe this company is a good proxy for the rebound in ag stocks and with no debt, its the best of the bunch for a conservative long term buy-and-hold (the death of which has been highly exagerated).

I believe it's a solid stock, under any circumstances, but right now think it's definitely going to merge or be acquired.

Joel Greenblatt/Magic Formula pick, coupled with high rating in CAPSshot (part of the MF Pro subscription)

A very well run fertilizer Co. This Co will be taker over by the Big Boys.