Are Seeds of Greater Gains Planted in This All-Time High?

Shares of Rentech Nitrogen Partners (NYSE: RNF  ) hit an all-time, post-IPO-high yesterday. Let's take a look at how it got here to find out whether there are still clear skies ahead.

How it got here
Rentech went public late last year, and since breaking away from fellow nitrogen fertilizer MLP Terra Nitrogen (NYSE: TNH  ) to the upside this summer, it's been by far the best stock in the fertilizer sector:

RNF Total Return Price Chart

RNF Total Return Price data by YCharts

Rentech's dip in May corresponded with its first dividend payout, as some shareholders may have decided to take their gains and get out. They missed out on an impressive summertime run that began in earnest after Rentech boosted its fiscal year EBITDA guidance by over $10 million. The new figure "in excess of $130 million" represents at least a 17% growth rate over the current trailing-12-month EBITDA of $111 million.

Rentech's fertilizer peers, meanwhile, have all seen their formerly fast-growing bottom lines stagnate as the year drags on -- with the exception of CF Industries (NYSE: CF  ) , which continues to post impressive gains to net income:

TNH Net Income TTM Chart

TNH Net Income TTM data by YCharts

Can Rentech keep growing? Do its fundamentals support its current position at the top of the nitrogen fertilizer heap? Let's take a look.

What you need to know
Rentech's valued more highly than any of its peers, but you should be able to figure out why:

Company

P/E Ratio

Net Margin (TTM)

Dividend Yield

Projected Growth Rate (2013)

Rentech Nitrogen Partners 17.6 34.0% 13.8% (1.7%)
Terra Nitrogen 13.2 38.4% 7.7% N/A
CF Industries 8.0 27.3% 0.8% (9.3%)
CVR Partners (NYSE: UAN  ) 13.1 44.0% 9.4% (1.3%)

Source: Yahoo! Finance. N/A = not available.

Quite the yield, isn't it? However, it's important to keep an eye on the company's payout ratios. Based on limited available data, I calculated that Rentech's free cash flow payout ratio (which can be a more accurate way to analyze the sustainability of a dividend) was nearly 200%. That's not as bad as CVR Partners, which was paying out three times its free cash flow at the time. It is something to watch, since no one likes a sudden dividend cut. As more data flows in over the next few quarters, we should gain a better idea of how sustainable that eye-popping yield really is.

What's next?
Where does Rentech go from here? That'll depend in large part on the cost of natural gas, its key fertilizer input. Rentech's processing facility in Illinois can tap into a key natural gas pipeline, which will help keep transport costs low. The United States Natural Gas Fund (NYSE: UNG  ) continues to bob around near the all-time low set in April:

UNG Total Return Price Chart

UNG Total Return Price data by YCharts

Any calls for nat-gas prices to start rising have thus far proven premature, but it's almost certain that prices will rebound eventually. Investors need to keep that in mind, and be on the lookout for answers to price-related questions of when and how high the rebound will be as both will impact Rentech's profitability.

Crop conditions are also worth watching. This year's severe drought conditions should only increase the demand for corn, as supplies run lower than expected. Analysts don't expect fertilizer companies to grow next year, but they may not have factored in the myriad ways that sharply reduced corn harvests might affect the demand (and costs) for all sorts of related products.

The Motley Fool's CAPS community has given Rentech a four-star rating, with 10 out of 11 All-Star CAPS players expecting the company to keep beating the Street.

Interested in tracking this stock as it continues on its path? Add Rentech to your Watchlist, for all the news we Fools can find, delivered to your inbox as it happens. You shouldn't focus exclusively on high-yielders in seasonal industries. Diversify your dividends with the help of the Fool's free report on nine rock-solid-dividend stalwarts. It's got everything you need to make a great buy for your portfolio today, so click here to get your free report now.

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.


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