Terra Industries, Inc. (TRA)

the market dives 140 pts to 11,920 and one of the only groups working are the fertilizers.... how do you think they will work in a good market? at the end of the day we are still in the early innings of fertilizer stocks

bought with real money at 53.67....

wall street has to put money to work... you have cash and bonds... and although capital preservation is important, at some point you have to put money on equities... most industry groups are broke and should only be bought on technical bounces... oil stocks are tied to the price of oil and I think that is a bubble.... food and shelter was important in caveman days and it still is now.......... even a chimp knows that

TRA was recently made a top pick by Citi's analysts... i am comfortable with this stock since I have owned it in the past.... i prefer to buy on pullbacks, but this group is too strong to risk letting it run

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.

Yet another agriculture product that is golobal. This industry is going to take off and continue to run as world wide consumption grows. Even in a poor market that is moving down, this company is still making strong gains.

Its still very early in this industry with a lot of room for growth. Aggriculture is a safe investment. Even when times are tight, people are still going to eat.

This company recently was a top pick by citi's analysts.

With grain and corn inventories at historical lows, demand for fertilizer is increasing. Natural gas is a major cost component to produce fertilizer and methanol both of which Terra Industries produces. With the mild winter, the recent pullback in natural gas prices, will increase earnings of Terra Industries in the short term.

$4.5 billion Cap.

Terra Industries, Inc., together with its subsidiaries, engages in the production and marketing of nitrogen and methanol products for agricultural and industrial markets worldwide. It operates in two segments, Nitrogen and Methanol.

est pe = 7 (ttm pe = 12)
Small dividend

Profit Margin (ttm): 16.60%
Operating Margin (ttm): 26.05%
Return on Assets (ttm): 22.22%
Return on Equity (ttm): 48.04%
*these are wow numbers. likely not to be exactly replicated...but great nonetheless

under 2 x sales
Qtrly Revenue Growth (yoy): 21.70%

$420 mm in cash after debt deducted ($330 mm in debt and 750mm in cash)

Good cash flows.

I am going long the more diverse and cheaper valuation agriculture plays....because I believe that as the world overall wealth grows and individuals are brought out of poverty around the globe...the top of the list of changes that will occur for these people is to eat better and to "properly" feed their families.

At the same time valuations on MOS POT MON are out of hand.

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.

As of close of business on 12/31/07, this was a 1-star Morningstar stock trading at more than double it's Morningstar fair value.

"Shares of Terra Industries Inc., which makes nitrogen for fertilizer and for industrial uses, tumbled Friday after an analyst downgraded its shares on concerns that a recent drop in prices for urea, a nitrogen-containing substance, could last into next year."

-Don't you just hate it when piss loses value.

up 12% today on speculation and has been on a tear this rally, even though the fundamentals don't justify it. i'm closing my position tomorrow (should have today) and expect this to underperform drastically

I am going to put this one squarely on floridabuilder. I looked at the write up that you did and with all the details you gave on this I couldn't help but put it in here with an outperform. Everything looks positive for growth.

Eating is not a fad. Should do well in the downturn.

TRA is a misunderstood stock, it seems. They are the General Partner and owner of TNH, which is en fuego. TNH has been giving out dividends and the stock has been a multi-bagger over the past few months. But going forward, TRA shareholders will benefit more from TNH because of the IDRs of the General Partnership. TRA, during the last call, also noted that they're getting out of methanol to focus on nitrogen fertelizers. I wish I'd gotten in this one much earlier, but even now, TRA can easily hit $30s. And you can thank corn-based ethanol for it!

INCREASED PROSPERITY IN EMERG MKTS LEADING TO STEADILY INCREASING DEMAND FOR ACCELERATED FOOD PRODUCTION, PERSISTENT ETHANOL IDIOCY IN US & EUROPE, PAST PERFORMANCE OF STOCK OVER 1 + YEARS

Increased corn acres, decreased NG costs will provide returns to TRA in the realm of what we're seeing from oil companies right now. As long as railfreight gets things together and stops jabbing TRA on ANH rail shipments.

This growing food shortage problem is going to get worse and since the dems are going to be taking over the White House, I'm pretty sure right now is a good time to get into agricultural chemicals. Say hello to government aid money.

don't believe in fertilizer stocks

An unusual reload after a huge loss. At a certain point, you might as well bank the loss and shoot for a reversal. Please see my blog for my critiques of and alternatives to the current incentive structure that agitates for idiotic gameplay like this, as well as some delectable bonus invective (my favorite recently, a don't-let-the-door-hit-your-ass-on-the-way-out comment from someone with TMF in front of his handle -- tasty!)

My original pitch:

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Short fertilizer on soft-landing demand slowdown, clueless ethanol rally. A huge loser so far, but in CAPS, who care? My ranking is driven by accuracy alone now, so a -1 is the same as this -30. Eventually I may reload, to try capturing more "accuracy" (gag) points on the way back down, but I think I want to lose a few more points on this name first.

What does it tell us that under the current incentive structure I currently have no incentive whatever to have made the "right" call on this stock once I had a negative point locked in?

It tells me the system is broken, but I welcome defenders to reply to this pitch or on my blog.
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undiscovered gem in a strong uptrend group

Value pick. From Zacks.com:
Terra Industries, Inc. (TRA) exceeded analysts' earnings
expectations in two out of the past three quarters by an
average margin of 97.7%. Consensus earnings estimates for both this quarter and the full year have risen over the past week. This Zacks #1 Rank stock is authorized to repurchase 9.5 million shares by Jun 30, 2008. TRA is currently trading at a valuation of 14.8x current fiscal-year estimated earnings and at 11.7x next fiscal-year estimated earnings.