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Which Fertilizer Stock Should You Buy Today?

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Welcome to "Stock Smackdown," where two of your favorite fertilizer stocks will go head to head in a battle for superiority. They'll each be judged on a series of objective merits, including valuation, earnings quality, and dividend quality.

The winner will be the stock that racks up the most points at the end of the competition. Let's go to ringside and meet our two combatants, Terra Nitrogen (NYSE: TNH  ) and CVR Partners (NYSE: UAN  ) .

In this corner...
Fair warning: I'm a pretty big Terra bull. I've written positively on the company before. I dubbed it one of the stocks you should buy to buck the "sell in May" trend, and I earlier wondered if it might be the best fertilizer stock around. Fool analyst Dan Dzombak's Value Investor 500 list validated my optimism by ranking Terra first among all U.S.-based companies. There are a lot of positives in Terra's corner. But that doesn't mean I'm going to rig the match in its favor, and CVR Partners is no slouch, either.

Like Terra, which can generate superior margins thanks to the support of majority owner and leading fertilizer-purveyor CF Industries (NYSE: CF  ) , CVR has the backing of CVR Energy (NYSE: CVI  ) , which allows it to make use of cheap raw materials flowing directly from CVR Energy's nearby refinery. As my fellow Fool (and fertilizer guru) Neha Chamaria notes, CVR Partners also enjoys the benefits of location in other ways: It's smack dab in the American corn belt, near a major railway line. Every little advantage counts in this battle.

Valuation battle
We use many different numbers when talking about the value of a stock. The price-to-earnings ratio is the standard, so we'll check each company's current P/E and five-year historical average P/E. We'll also use price to free cash flow. Earnings can be gamed with a number of different accounting tricks, but free cash flow is harder to manipulate, making it a favored metric here at the Fool.

In each case, the difference between a stock's current ratio and its five-year average ratio will be more important than the numbers themselves. Stocks trading significantly lower than their average ratios may have more room to return to that middle ground.

For the tiebreaker, we'll check one less-used financial metric: the debt-to-equity ratio. A company with little or no debt is usually in better shape than one leveraged to its eyeballs.


Terra Nitrogen

CVR Partners

P/E 12.3 13
5-Year Average P/E 12 12.8
P/FCF 13.2 14.8
Debt/Equity 0 0.3

Sources: Wolfram Alpha; Morningstar; Yahoo! Finance. Winners in bold.

It looks like Terra takes this round, in part due to its longer history on the markets. CVR has a chance to come back. How will it fare in the next round? Let's find out.

Earnings quality battle
A company can be cheaply valued without being a good value. To balance out our valuation fight, let's look at a few key earnings statistics for each company. We'll look at gross and net margins, a five-year annualized rate of earnings growth, and consecutive years of both positive earnings and earnings growth since 1992, two decades ago. A company with no momentum today is less likely to become a superstar later -- it has happened before, but not often.


Terra Nitrogen

CVR Partners

Operating Margin 63.9% 45.6%
Net Margin 36.5% 44%
3-Year Annualized Earnings Growth 26.5% 27.1%
Consecutive Profitable Years 8 7
Consecutive Years of Earnings Growth 2 1

Sources: Morningstar; Wolfram Alpha. Winners in bold.

Terra takes the earnings quality crown, despite a strong showing from CVR Partners on bottom-line results. Can Terra come out ahead for good in the dividend battle ahead?

Dividend battle
A growing company is great, but one that pays you back is even better. Since both companies are paying dividends today, let's see how strong and stable they really are. We'll examine yield, the earnings and free cash flow payout ratios, the five-year annualized dividend growth rate, and each company's current streak of uninterrupted payments.

Those payout ratios are important, particularly the free cash flow payout ratio. Companies that pay out more than they take in can rarely sustain such practices for long.


Terra Nitrogen

CVR Partners

Dividend Yield 7% 9.8%
Payout Ratio 110% 267.8%
Free Cash Flow Payout Ratio 112.5% 320.5%
5-Year Annualized Dividend Growth 3.4% N/A
Years of Uninterrupted Dividends 8* 1

Sources: Morningstar; Yahoo! Finance; Dividata. Winners in bold. *Terra did not pay dividends consistently from 1998 to 2004.

CVR's unsustainably high payout ratios are major red flags. Although both companies are master limited partnerships and thus obliged to pay out nearly all of their earnings to shareholders, CVR's big payout is coming from the cash pile created by a debt issuance and an IPO. Rentech Nitrogen Partners (NYSE: RNF  ) is in a similar position, having recently gone public while issuing debt, and is now tapping both sources of new cash to pay out much larger dividend yields than may be sustainable.

Terra takes this round handily and thus sweeps the competition.

What the numbers tell us
It can be tempting to jump on a huge yield, like CVR's 9.3% or Rentech's eye-popping 15.4%. But it's also important to know where the payout is coming from, and if it can't be held up by a company's earnings, you could be in for a painful cut and a market correction. If CVR's ratios were in better shape, it might be heading into a pitched battle in the finale, but it just can't compete with Terra's history and stability.

If you're still on the hunt for some sustainable dividends paid by great companies, take a look at the Fool's latest free dividend report, "The 3 Dow Stocks Dividend Investors Need." You can find great gains without extreme yields, so click here to get the free information you need to build a stronger portfolio today.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights.

The Motley Fool owns shares of CF Industries Holdings. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (3) | Recommend This Article (5)

Comments from our Foolish Readers

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 August 06, 2012, at 3:07 PM, Domeyrock wrote:

    you know how companys get a good history? By CREATING IT. Don't sleep on UAN

  • Report this Comment On August 06, 2012, at 3:09 PM, paultaut wrote:

    I imagine the american consumer wil have a lot to say in the coming months about the jump in prices of all food proucts even remotely connected to corn.

    And as an additive, Ethanol will be responsible for maintaining high fuel prices. So I expect Political support to be removed from it.

    Enter Rentech with its Nitrogen based additive. It will no longer be soley dependent on fertilizer to maintain income.

    The stocks you are "pushing" are especially vulnerable to Planting Cycles and are very weather related.

    When push comes to shove, Do you expect any of the above stocks to double in next 12 months?

    IMO RNF will.

  • Report this Comment On August 07, 2012, at 5:25 PM, minnjim1 wrote:

    So UAN pays a whopping 9.8% dividend NOT from its net profits, or its free cash flow, but from its cash on hand? I give up. Why would a company do that? There must be a reason, but it escapes me.

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Related Tickers

10/21/2016 4:02 PM
TNH $107.45 Down -0.46 -0.43%
Terra Nitrogen CAPS Rating: ****
UAN $5.15 Down -0.01 -0.19%
CVR Partners CAPS Rating: ****
CF $25.92 Up +0.94 +3.76%
CF Industries Hold… CAPS Rating: ****
CVI $15.15 Up +0.58 +3.98%
CVR Energy CAPS Rating: ***
RNF.DL $0.00 Down +0.00 +0.00%
Rentech Nitrogen P… CAPS Rating: ***