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.
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.
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.