Should You Buy Terra Nitrogen on the Dip?

There's no way to sugar coat this one. Terra Nitrogen (NYSE: TNH  ) presented very dissapointing Q3 results and the stock promptly declined 30%. But this drop is exactly what some value investors look for, provided this miss was a one-time event and not the beginning of a disturbing new trend. Let's take a closer look to see if this stock is really the bargain you've patiently been waiting for or a value trap.

Terra Nitrogen was acquired by CF Industries (NYSE: CF  ) in 2010, creating a global nitrogen bellwether and one of the leading manufacturers in North America. This symbiotic relationship gave Terra the security of a larger parent company, while CF feeds off the highest yield in the fertilizer industry, providing cash for further expansion.

So why did Terra stumble in Q3?

Three main factors stood out as contributing to a poor Q3. Ammonia and UAN average selling prices decreased by 8% and 6%, respectively. Ammonia and UAN sales volume decreased by 37% and 20%, respectively. Finally, realized natural gas costs per MMBtu increased by 10%. While the selling prices and input costs had their negative effects, it was the sales volume decrease that really spooked investors. But, the decreases in sales volume for both ammonia and UAN were due to planned plant turnaround activities during the third quarter of 2013. So, in essence this isolated event has provided us with a unique buying opportunity.

Currently Terra is trading at $140 and sports a yield of 10.30%. With a P/E of around 8 this stock appears undervalued compared to the industry average of 14.70. Momentum is on the downside, so it might be possible to pick up shares of Terra even cheaper in the coming days or weeks in spite of the heavily oversold conditions.

But the future remains positive, as noted in CF Industry's Q3 report: "attractive crop economics, strong product demand and CF Industries' North American cost advantage continue to support the company's long-term earnings prospects." Those variables and outlook hold true for Terra as well.

However, outside the nitrogen space the future appears sketchy. Following the breakup of the Belarus potash group in July, pricing stability has been threatened and stocks in that space have plunged accordingly. Mosaic (NYSE: MOS  ) , a key premier potash supplier, is seeking to reinvigorate its business through the purchase of CF's phosphate division. This diversification could help Mosaic as the potash space becomes more competitive, especially given BHP Billiton's  (NYSE: BHP  ) foray into the sector with the almost $4 billion Jansen project in Saskatchewan.

This uncertainty in the potash market, along with massive supplies from BHP projected to come online in 3-4 years, will only increase the volatility in this highly competitive sector. Therefore, stocks without potash exposure, like CF or Terra, should fare much better than highly exposed companies.

Foolish conclusion
No stock goes straight up forever. When good companies with solid balance sheets hit a stumbling block the wise investor takes notice. Often these one-time drops can provide a favorable entry point, increasing purchasing power and the yield received. Currently Terra's low valuation and high yield fit this description. Couple this with organic growth as well as increasing demand for its product (due to rising income and population growth) and this could be a recipe for great investing.

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