Top 3 Picks in the Fertilizer Space

The fertilizer space has rolled out some of the most impressive performances in the past few months. As we brace ourselves for a new year ahead, I've examined three fertilizer companies that impress me and are worth your watch. Take a look.

Terra Nitrogen (NYSE: TNH  )
Most of us go crazy about a company that fills our platter with yummy dividends. Terra does that well, offering an astounding dividend yield of 10.2% currently. How does Terra do it?

Well, since Terra is structured in the form of a master limited partnership, it can pass on any taxable income directly to its shareholders instead of paying income tax. Hence, such high dividends could also be sustainable. Though the company expects higher capital expenditures in 2012, its dividends could soften a bit. But I don't think that would be a drastic change.

Among other things in Terra's favor, the primary one is a buoyant agricultural sector followed by higher sales and prices for Terra's nutrients. But Terra's solid top-line growth in its last quarter wasn't only because of sky-high fertilizer prices.

The company raised production that boosted volumes. This deadly combination of high prices and volumes more than tripled its profits from last year. For the nine months ended Sept. 30, Terra's revenue surged 42% while net profits shot up a staggering 178% from the same period last year.

Crop prices are likely to remain firm as a growing population and higher spending power continue to fuel demand for food, particularly from the emerging markets. Moreover, with countries such as China and India stepping in as big purchasers of nutrients, Terra looks well-poised to charge ahead.

CVR Partners (NYSE: UAN  )
This younger fertilizer player is another dividend superstar (again because it's an MLP), currently having a dividend yield of 9.7%.

Being a new kid on the fertilizer block, CVR is likely to be more aggressive in its plans to gain a foothold in a market dominated by biggies such as PotashCorp (NYSE: POT  ) and Terra. This is already evident from the major urea ammonium nitrate expansion program CVR is currently busy with, which is expected to be completed by 2013.

Two advantages CVR has? One, it is shielded from natural gas price swings since it uses pet coke as feedstock unlike most competitors. Moreover, almost 70% of this pet coke is sourced from CVR Energy's (NYSE: CVI  ) adjacent refinery. CVR Energy is the company from which CVR Partners was spun off some months back. Two, CVR's strategic location in the U.S. corn belt results in twofold benefits for the company -- higher sales of its nutrients as well as transportation cost advantages.

The agriculture boom working in Terra's favor works for CVR, too. Its last-quarter revenue climbed 66.4% and bottom line more than doubled year on year. CVR's total debt-to-equity ratio of 26% is also lower than most peers.

Great business line, growth moves, and dividends make CVR a tasty treat.

Yongye International (Nasdaq: YONG  )
Short-sellers are giving this company a really tough time, but Yongye's last quarter was mind-blowing. Its revenue shot up a staggering 95.9%, more than doubling its bottom line. For the nine months ended Sept. 30, its sales increased by 85.7% while net income rose 88.4% from the same period last year.

Ironically, Yongye being based in China is causing its stock all the pain on the U.S. stock exchanges, but it is actually working for it when it comes to business! China offers great opportunity for fertilizer makers. Like its rival China Green Agriculture (NYSE: CGA  ) , Yongye is currently focusing on promotional activities to tap new markets in the highly fragmented Chinese rural areas. This move resulted in higher sales for both companies.

But the more noteworthy move is Yongye's strategy of sourcing key raw materials from its own Wuchuan facility (it became operational last year). This facility has not only increased Yongye's production capacity, but is also resulting in cost savings.

Moreover, Yongye's recent approval from the government to explore mineral resources for its designated project site in Wuchuan is an important step toward building the site as a long-term raw material source. The resulting cost advantages should blend well with higher demand for fertilizers to keep the company's margins strong in the future.

The Foolish bottom line
No matter how advanced farming methods become, fertilizers will never go out of fashion. And with demand for food rising globally, fertilizer makers should remain busy. Among all the fertilizer players, I think the three mentioned above definitely deserve a spot on your watchlist.

Add them now to your stock watchlist to make sure you do not miss out on any news, updates, and analysis on any of these companies.

Neha Chamaria does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Yongye International. Motley Fool newsletter services have recommended buying shares of Yongye International and China Green Agriculture. 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.


Read/Post Comments (3) | Recommend This Article (14)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 14, 2011, at 4:39 PM, 123spot wrote:

    Neha, could you flesh out your opinion of the newest Seeking Alpha on YONG out this week. SA board members are asking and waiting. TIA. Spot

  • Report this Comment On December 14, 2011, at 11:10 PM, tkell31 wrote:

    Isn't it borderline criminal to keep pumping frauds like YONG? I mean how do you justify relying on any of the financials a Chinese Reverse Merger puts out given all the fraud in that sector? Finally, if the stock is as absurdly cheap as the numbers suggest wouldn't even a remotely well run company either buy back shares or consider going private? Sad thing for me was I bought into all this BS on companies like CCME, CHBT, CSKI, CGA etc and cost myself a pretty good chunk of change. YONG is just another chapter in the same book.

  • Report this Comment On December 16, 2011, at 12:58 PM, MonsterFluff wrote:

    Yongye does not produce fertilizer. It makes a product similar to peat moss--a complex carbon based molecular soup

    As such, it does not compare to UAN or Terra. Yongye product is not a required nutrient for plants. It would be more correctly thought of as a discretionary purchase where fertilizers, including nitrogen, phosphate, and potassium, are not optional when farmers need high quality and yield

    I have been unable to figure out how Yongye is convincing farmers to purchase this relatively high-priced item. Maybe they are not. Cash sales are poor as receivables reached all-time highs last Q indicating either that product is sitting on distributor shelves unsold or that the customers cannot afford to pay their bills.

    Make sure you cover their next quarter and update us on how the collections went and if they actually have some cash to show for all their awesome growth

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