Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Terra Nitrogen (NYSE:TNH) fit the bill? Let's look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Terra's story, and we'll be grading the quality of that story in several ways:

  • Growth: Are profits, margins, and free cash flow all increasing?
  • Valuation: Is share price growing in line with earnings per share?
  • Opportunities: Is return on equity increasing while debt to equity declines?
  • Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Terra's key statistics:

TNH Total Return Price Chart

TNH Total Return Price data by YCharts.

Passing Criteria

3-Year* Change 


Revenue growth > 30%



Improving profit margin



Free cash flow growth > Net income growth

279.4% vs. 215.6%


Improving EPS



Stock growth (+ 15%) < EPS growth

145.3% vs. 215.9%


Source: YCharts.
* Period begins at end of Q4 2009.

TNH Return on Equity Chart

TNH Return on Equity data by YCharts.

Passing Criteria

3-Year* Change


Improving return on equity



Declining debt to equity

No debt


Dividend growth > 25%



Free cash flow payout ratio < 100%** 



Source: YCharts and Morningstar.
* Period begins at end of Q4 2009.
** 100% used due to MLP structure requiring 90% earnings payout.

How we got here and where we're going
Terra very narrowly misses out on a perfect nine out of nine passing grades. Had we analyzed the company a year ago, it might well have passed -- Terra's dividend payouts were lower than its free cash flow in 2011. And those dividend payouts have been huge and hugely attractive, as the company hasn't financed its payout with debt at all despite maintaining a yield in excess of 7% for years. Terra's already achieved greatness for early shareholders, but is it destined for more? Let's take a look.

As a publicly traded subsidiary of fertilizer maker CF Industries (NYSE:CF), Terra gets beneficial access to the natural gas feedstock available to its parent. Since both companies operate on similar manufacturing models, we can also use CF as a gauge of Terra's potential. This year, CF is improving -- especially on the bottom line. Its earnings per share grew 30% year-over-year as of its most recent report, thanks almost entirely to the plummeting costs of natural gas. The problem Terra faces is that it's less able to adapt to changing market trends than its larger parent. Natural gas prices are pretty much the end-all for Terra, although higher capital expenditures and production agreements with CF can impact the MLP's ultimate profitability. Where are natural gas prices going? It sure looks like the wrong direction, as far as Terra's profitability is concerned:

Henry Hub Natural Gas Spot Price Chart

Henry Hub Natural Gas Spot Price data by YCharts.

That's not a good trend for nitrogen-using fertilizer makers. We've already seen some indication that steady profit growth may be ending, as fellow nitrogen fertilizer MLP CVR Partners (NYSE:UAN) reported results virtually identical to last year's, instead of enjoying strong growth as it has in the past. The one thing in these companies' favor is the simple fact that farmers need fertilizer, now perhaps more than ever in light of persistent droughts that are making every alternative to watering more valuable. That can help maintain Terra's profitability in the face of rising input prices, but for how long? Farmers can only bend so far before their finances break.

Putting the pieces together
Today, Terra has many of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

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 insight into markets, history, and technology.

The Motley Fool owns shares of CF Industries Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.