In uncertain economic times, a golden rule for investors is to steer clear of companies that produce seasonal goods and invest in the ones that manufacture essential goods such as medicine and food or goods that support the production of essential goods.
A little background
CVR produces about 2,000 tons of urea ammonium nitrate and about 1,200 tons of ammonia per day, which makes it one of the leading producers of fertilizers in the U.S.
The company also owns Coffeyville Resources Nitrogen Fertilizers, which has a manufacturing plant in North America that uses petroleum coke to manufacture nitrogen fertilizers instead of natural gas. The company is a subsidiary of CVR Energy
CVR Partners reported net income of $36.3 million in the third quarter compared to $13.5 million in the same period last year. Sales jumped from $46.6 million a year ago to $77.2 million in Q3 2011. The jump in profit is attributed to the strong demand for its products, which is expected to grow stronger in the coming months.
Despite the increase in prices of raw materials such as ammonia and urea ammonium nitrate, the company managed to increase its revenue as production remained high for the quarter, and the strong demand for fertilizers boosted its sales figures.
Expected increase in demand and production
Our world is now home to more than 7 billion people, and feeding them all is a major challenge for food producers. Consequently, there would be an obvious increase in demand for products manufactured by CVR Partners and other fertilizer players such as PotashCorp
CVR has decided to increase the yearly production of urea ammonium nitrate to 1,075,000 tons from 675,000 tons by the first quarter of 2013. However, the company faces intense competition from CF Industries
High dividend payment
CVR Partners went public just this past year, and it had set a goal to pay an annual dividend of $1.92 for the 12 months ending March 31, 2012, which gives a yield of more than 7.5% to its shareholders. The goal very much remains on track, as it declared cash distribution of $0.572 per common unit for Q3 2011. The management also discussed its plan to increase the production of fertilizers, which is likely to increase the dividend yield further.
The Fool's bottom line
The performance of the fertilizer industry makes me optimistic about this stock. There is a ready market for CVR's products, and its plan to increase output by about 50% will only mean further increase in revenue. Although fertilizer prices can be a little volatile these days, growing food demand makes it attractive for the long run. Besides, a strong performance in such volatile times only means stronger results in improved market conditions.
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