As 2013 begins, now's a good time to look at the future prospects for the stocks you own. If you don't know where a company's headed in the next year and beyond, then it's impossible to make an informed decision about whether you should add the stock to your portfolio -- or sell it if you already own it.
Today, I'll look at Terra Nitrogen (NYSE:TNH). The fertilizer master limited partnership grew like a weed in 2012 as the combination of low natural gas prices and high demand for yield-enhancing farm products produced strong performance. But will the coming year be as favorable for the industry? Below, you'll learn more about Terra Nitrogen's prospects for 2013.
Will Terra Nitrogen keep growing in 2013?
For whatever reason, it's hard to find analyst estimates for Terra Nitrogen. One possible cause could be that its status as a master limited partnership clouds its financial picture somewhat, although analysts don't have similar problems with other MLPs. If expectations for Terra parent CF Industries are any indication, though, Terra could have a mixed year, as analysts see CF posting modest gains in share price but suffering from declining earnings per share.
Much of the appeal of Terra Nitrogen and fellow fertilizer MLPs CVR Partners (NYSE:UAN) and Rentech Nitrogen Partners (UNKNOWN:RNF.DL) comes from their high dividend yields. In terms of sustainability, all three companies raise some concerns, as distribution rates are above earnings per share. Still, Terra Nitrogen distributes only a few pennies more per share than it earns, which puts it in better shape than CVR or Rentech Nitrogen in terms of having a manageable distribution rate. That in turn should support shares as long as the company keeps profits up.
On the profits front, though, the future is much cloudier. Natural gas prices rebounded significantly from their lows of last year, and although prices have fallen back a bit more recently, huge future demand for plentiful natural gas should help bring the supply demand equation back into equilibrium. The resulting input cost increases would cut margins and reduce the competitive advantage that Terra and its nitrogen fertilizer peers have had against companies specializing in other types of fertilizer, such as potash-producing Mosaic (NYSE:MOS) and PotashCorp (NYSE:POT).
As always, the big unknown for the ag industry is the weather. After last year's drought, farmers are preparing for whatever Mother Nature throws at them. Increasingly, though, fertilizers have become a constant part of the equation for farms regardless of weather conditions, and with farmers still relatively prosperous, they have the money to spend to enhance yields.
Terra Nitrogen remains an intriguing agricultural play, and one that has potential to keep rising. As long as the world needs food, Terra will have opportunities to grow.
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Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool owns shares of CF Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.