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CAPScall of the Week: Rentech Nitrogen Partners

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For years, satirical late-night TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. congressional districts and its representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.

That's why I've made it a weekly tradition to examine one seldom-followed company within the Motley Fool CAPS database, and make a CAPScall of outperform or underperform on that company.

For this week's round of "Better Know a Stock," I'm going to take a closer look at Rentech Nitrogen Partners (UNKNOWN: RNF.DL  ) .

What Rentech Nitrogen Partners does
As you may have correctly suspected from the name, Rentech Nitrogen is a nitrogen-based fertilizer company. It has two production facilities in the U.S., and its fertilizers, which include ammonia, urea ammonium nitrate solution (UAN), and ammonium sulfate, are sold through distribution agreements to help aid farmers with regard to crop yield.

In Rentech Nitrogen's most recent quarter, revenue increased by 47% to $92.4 million as operating income fell slightly to $21.3 million. Both results -- the boost in revenue and the reduction in operating income -- relate to the company's acquisition of its Pasadena facility, which was included in two months of last quarters' results. What you might refer to as comparable-store sales fell because of lower realized fertilizer prices and demand, and gross margin dipped 10 percentage points to 31%.

Whom it competes against
There is certainly no shortage of competitors in the fertilizer industry. Rentech is actually somewhat of a small player at a $1.4 billion valuation compared with CVR Partners (NYSE: UAN  ) at $1.9 billion, Terra Nitrogen (NYSE: TNH  ) at $3.8 billion, and Agrium (NYSE: AGU  ) at $13.5 billion.

Working against the entire industry have been weaker commodity prices, which have sacked fertilizer prices across the board. Potash producers such as PotashCorp (NYSE: POT  ) and Agrium have seen prices per ton sink from more than $455 last year to just $390 as of the end of March. Things are even worse, though, for nitrogen-based fertilizer producers in terms of the price drop they've witnessed. Last spring, liquid UAN had been going for $450 a ton and was down to $350 a ton to start the year. The drop was even more noticeable for dry urea nitrogen, which tumbled from as high as $750 a ton to $440 a ton. 

For Terra Nitrogen and Rentech, there's not much flexibility. With natural gas being a primary input to creating nitrogen-based fertilizers (the hydrogen in natural gas reacts with nitrogen to create ammonia), higher nat-gas prices will work against both companies. Since last year, nat-gas prices have roughly doubled, which has quickly reduced margins in all three cases.

CVR Partners is a special case, as my Foolish colleague Maxx Chatsko pointed out last month, because it doesn't use nat-gas to make nitrogen-based fertilizer. Instead, as Maxx points out, CVR uses pet coke, which offers a much less volatile cost solution than natural gas.

Agrium presents a particular challenge to Rentech as well, since it transcends all barriers, producing potash, phosphate, and nitrogen-based fertilizers. With global and product diversity under its belt, Agrium is a tough company for Rentech Nitrogen to compete against.

The call
After carefully reviewing the prospects for Rentech Nitrogen Partners, I've decided to place a CAPScall of outperform on the company.

There are three primary reasons I think Rentech Nitrogen makes for an attractive buy, even near a 52-week high.

First, it seems like a pretty safe bet that the need for higher crop yields is only going to increase as time moves on. The world's population is increasing, and urban areas are becoming even more densely populated, putting greater pressure on farmers and genetic companies to modify seeds and nutrients in an optimal way to create higher crop yields. This isn't so much as a case of "my company is better than yours" as opposed to a market that's constantly growing and creating additional market share.

Second, Rentech Nitrogen just completed a refinancing of $320 million, which is going to lower its interest expense, freeing up precious cash to complete its expansion and significantly boost its quarterly distributions over the coming years. According to the company's press release, beginning in 2014 shareholders can expect an $0.18 increase to their annual payout, with that total rising to $0.69 by 2017. With Rentech already paying $2 per year in dividends (a 5.4% yield), we could be looking at a bump over 6% by next year, assuming the share price remains unchanged.

Finally, while I'm a natural gas bull over the long term, I also can't see how nat-gas prices head considerably higher in the interim, with such an overabundance of supply buried in the various shale regions of the United States. If prices head much higher, nat-gas drillers will simply produce more and prices will begin to fall as stored supplies rise. It's a vicious Catch-22 that ensures costs will never get too out of control for nitrogen-based fertilizer companies.

Is this the most trusted name in fertilizer?
With less and less arable land available around the world, increasing yields from existing plots could become vitally important to keeping up with expected population growth. Cheap and effective fertilizers could be the key to achieving this goal. As the global leader in potash production, PotashCorp has established several barriers to entry that make it nearly impossible for competition to break through. Click here now to access The Motley Fool's premium research report that covers precisely what these barriers to entry are and details several other key reasons why PotashCorp presents such a compelling investment opportunity today.

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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 May 08, 2013, at 2:58 AM, trenton1ryan wrote:

    <<There are three primary reasons I think Rentech Nitrogen makes for an attractive buy, even near a 52-week high.>>

    52-week high??? Perhaps you meant 52-week LOW?? The 52-week high is near 50. The stock is trading in the $34-35 range at the moment. It recently bounced off the $30 level, so I'm not sure what you are saying actually.

    I do agree that RNF will outperform though, particularly from these (mid $30s) levels. My avg price is around $36, and I'm holding and hoping to add at these levels. I agree with the author that the distribution will rise from here, and am holding largely b/c the distribution is still decent, and I think it will head back to $50 over the next 12 months with probable distribution increases along the way.

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Related Tickers

12/31/1969 7:00 PM
RNF.DL $0.00 Down +0.00 +0.00%
Rentech Nitrogen P… CAPS Rating: ***
AGU $90.34 Down -1.32 -1.44%
Agrium CAPS Rating: ****
POT $15.91 Down -0.04 -0.25%
PotashCorp CAPS Rating: ****
TNH $111.80 Down -0.29 -0.26%
Terra Nitrogen CAPS Rating: ****
UAN $5.26 Up +0.04 +0.77%
CVR Partners CAPS Rating: ****