Has Terra Nitrogen Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Terra Nitrogen (NYSE: TNH  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Terra Nitrogen.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 9.1% Fail
  1-Year Revenue Growth > 12% 18.3% Pass
Margins Gross Margin > 35% 69.6% Pass
  Net Margin > 15% 38.4% Pass
Balance Sheet Debt to Equity < 50% 0% Pass
  Current Ratio > 1.3 7.62 Pass
Opportunities Return on Equity > 15% 203.1% Pass
Valuation Normalized P/E < 20 11.99 Pass
Dividends Current Yield > 2% 7.8% Pass
  5-Year Dividend Growth > 10% 20.6% Pass
       
  Total Score   9 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Terra Nitrogen last year, the company has managed to hang onto its near-perfect score. Further revenue growth pulled that five-year-growth figure a bit higher, but shareholders aren't complaining about falling short after a 60% run-up in the stock over the past year.

Fertilizer has been a huge growth area over the past several years, as improving conditions in the agricultural industry have led farmers to spend more money on trying to boost production levels. Terra Nitrogen specializes in nitrogen-based fertilizers, and like competitor CVR Partners (NYSE: UAN  ) , Terra is a master limited partnership. CF Industries (NYSE: CF  ) owns a majority stake in Terra, giving CF investors an indirect interest in the company.

Terra Nitrogen owes its big success to the low price of natural gas. With gas being the primary input for nitrogen fertilizer production, Terra's wide margins come from its ability to keep costs low while still commanding premium prices for its fertilizers. That stands in sharp contrast to other parts of the fertilizer business, such as the potash production that Mosaic (NYSE: MOS  ) and PotashCorp (NYSE: POT  ) largely rely on. Mining potash is relatively expensive by comparison, which is one big reason why you'll see margins at Mosaic and Agrium much lower than Terra or CVR Partners.

The challenge that Terra Nitrogen investors face is the inherent uncertainty in the agriculture industry. Corn plantings reached record highs earlier this year, but the drought wiped out a lot of those crops. That could bring the best of all worlds next year if farmers are flush with crop insurance payments but also enjoy high corn prices resulting from supply constraints.

For Terra to improve, it just needs to keep executing its game plan and hope that natural gas prices don't recover too much. Stay tuned to see if Terra Nitrogen can reach perfection next year.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Terra Nitrogen may be almost perfect, but it's not the only stock worth looking at. Let me invite you to learn about three smart long-term stock plays in the Fool's popular special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Terra Nitrogen to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of CF Industries. 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 Fool has a disclosure policy.


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