There may be stormy weather ahead for the market. A long weekend didn't give investors much of a vacation, as ADP's employment numbers on Thursday presaged a worse report from the Bureau of Labor Statistics. In wobbly times like these, it becomes even more important to do some homework on the companies you own or have your eyes on. Those that can outperform in the future often leave a trail of positive signals in the past. With that in mind, let's take a look at Terra Nitrogen (NYSE: TNH) to find out if it fits the bill for future success.

Get out your microscopes
Several fertilizer companies have seen their stocks boom in the past year, but none so much as Terra Nitrogen, which has more than doubled in price since last April. The stock far outpaced majority owner CF Industries (NYSE: CF), whose shares rose only 34% in the same time frame. That might worry some people, but it's important to look at a broad range of information to determine whether such a pace can continue.


Trailing-12-Month (or Most Recent) Result

Annual Revenue $799 million
Annual Net Income $508 million*
Profit Margin 63.6%
Annual Free Cash Flow $506 million
Dividend Yield 7.0%
Market Cap $4.9 billion
Price to Earnings Ratio 16.9
12-Month Stock Price Growth 126.3%
Total Fertilizer Volume (2011) 2,432 tons
Fertilizer Volume Growth (Year-over-Year) 6.1%

Sources: Yahoo! Finance, Morningstar, Google Finance, and corporate 10-K filing. * Includes income allocable to general partnership interest.

Mo' money...fewer problems?
The first thing that jumps out to me is the big discrepancy between Terra's revenue growth and the amount of fertilizer it actually produced. As I found earlier this year, revenue grew over 40%, but fertilizer volumes are up only 6%! CF Industries saw even better revenue growth. If you'd like to know why, just look at changes in the price of natural gas, a key component in both companies' fertilizer production, when compared to the companies' stock prices and net incomes:

US Natural Gas Wellhead Price Chart

US Natural Gas Wellhead Price data by YCharts

Keep in mind that Terra only sold 18% more fertilizer in 2011 than it had in 2009. Yet net income grew far more. It's worth keeping in mind that changes in natural gas prices have an outsized effect on this company's profit potential, since its product line focuses on ammonia-based products derived from natural gas. It also makes it a little easier to anticipate the company's profits than it is for potash-focused fertilizer companies PotashCorp (NYSE: POT) and Mosaic (NYSE: MOS). Note how much Terra's profit margin jumped with the past year's natural gas price declines, especially relative to its peers:

US Natural Gas Wellhead Price Chart

US Natural Gas Wellhead Price data by YCharts

It's worth considering how much (if at all) the price of natural gas might grow in the future. Fellow Fool Brian Stoffel crunched some of the U.S. Energy Information Administration's numbers and found that a gallon of natural gas is projected to see smaller price increases over the next 30 years than gasoline. That's an important consideration for investors looking at ammonia-focused fertilizer companies.

Factors of production
But, is it enough to watch natural gas prices? Of course not. Crop prices are an important consideration as well, particularly the price of corn. Ammonia and urea prices are also a key consideration, as they're Terra's two primary finished-fertilizer components -- the broader fertilizer price index doesn't fully reflect their values:

US Corn Farm Price Received Chart

US Corn Farm Price Received data by YCharts

Despite a drop in the aggregate fertilizer price index, ammonia's price closely mirrored Terra's stock price exiting the recession. Ammonia's global prices went up at least threefold, from the start of 2009 to the end of 2011, before a recent price drop. However, ammonia market prices in the U.S. Midwest (where Terra's sales are based) remain at the heightened levels of 2011's waning months, indicating a strong year ahead for the company. This should also wind up being of great continuing benefit to CVR Partners (NYSE: UAN), another ammonia-centric fertilizer company. It should be of little surprise that its past-year stock price performance was one of the best in the fertilizer industry.

Urea, a key component in nitrogen-based ammonium fertilizer, saw its price move closely in line with corn's prices. How convenient for price watchers! With record corn plantings projected for 2012, the aggregate information points to continued strength in the company's top and bottom lines. There is a risk that crop prices may trend lower, so that's something to keep an eye on for the next growing season. As Terra is a master limited partnership, the complexities of reporting taxes on its high payout are also worth consideration.

Foolish final thoughts
I've been bullish on Terra's prospects since last fall, and the stock has been a great performer for me in The Motley Fool's CAPS. I'll be maintaining my outperform call on it for the foreseeable future based on the sum of this information, but I'd also caution investors to keep an eye on macroeconomic trends in crop and fertilizer prices. Farmers won't plant as much if their preferred crop's price tanks, and won't feel as pressed to push crop yields to the limit with more fertilizer. That will depress Terra's payout as well as its potential, since MLPs are obligated to pay out much of their profits.

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