Baffled by Terra Nitrogen Co. LP
I am always on the look out for companies that pay an out-sized dividend, then do some research and see where the cash comes from. Terra Nitrogen Co. LP (TNCLP) (TNH: 121.37 -2.79 -2.25%) caught my attention with its 8.4% yield. I was further intrigued when I saw the stock started the year at $32 and now trades north of $100.
TNCLP manufactures nitrogen fertilizer products used by corn and wheat farmers. Over the last year the company has rode the ethanol/corn/agriculture/fertilizer wagon to some very nice profits. It’s LP structure requires it to pay all of the free cash flow out as distributions and distributions are $6.67 for the first 3 quarters of this year vs. @2.89 for all of last year.
TNCLP is 75% owned by Terra Industries (TRA: 45.68 +0.47 +1.04%). Terra is the real fertilizer/nitrogen selling company. They manufacture and sell nitrogen fertilizer products primarily in the U.S. and Great Britain. TNCLP is basically a manufacturing facility in Oklahoma that is managed and controlled by Terra. The general partner of the limited partnership is a wholly owned subsidiary of Terra Industries. Besides the TNCLP plant, Terra owns 6 other facilities in North America and Great Britain, which are just assets of Terra without the LP structure. I did not dig deep enough to figure out why the finances of this one facility was structured differently.
Back to TNCLP and the intriguing share price and dividend history. I think this chart of the annual dividends helps give some understanding:
This appears to be a very cyclical business! The question is whether the cycle is still swinging upwards or ready to turn downwards. The market seems to believe the future dividends will continue to grow, or the current yield would be a lot higher. I am tend to believe the distributions will be strong for the next couple of quarters. My evidence is anecdotal:
Last month I spent a week visiting family in Minnesota and Iowa, prime corn country. The farmer’s were getting great corn yields and prices were high. So this spring they will have extra cash to put to work. Farmers often borrow money in the spring (government programs help out with this) and pay it back after harvest. An uncle who facilitates these loans said many will not need the loans in the spring. By using their own cash instead of borrowing farmers can double down on the 2008 crop. They will definitely make sure their fields are well fertilized.
The biggest expense towards the production of nitrogen fertilizer is natural gas. Terra does some moderate hedging of gas prices against orders received, but a spike in gas prices would definitely hurt profitability. Mating up TNH with 20 Stock Portfolio component Penn West Energy (PWE: 31.82 -1.24 -3.75%) would give a quasi self-hedging income stream.
At some point in time the cycle will turn on TNCLP and distributions will fade and the stock will be in the $20’s. Agriculture is a fickle business: bad weather can ruin a whole season. I would like to see a stock like this yielding 12-14% but I am going to add it to my hypothetical 20 Stock Portfolio to see what happens.
I currently do not have a position in TNH.
Chart source: terraindustries.com
Gigamedia has an excellent quarter and sparkling future.
20 Stock Portfolio member Gigamedia (GIGM: 10.71 +0.15 +1.42%) released 3rd quarter earnings before market open and the results were excellent. Revenue was up 76% YoY and net profits up 49%. The historically weak 3rd quarter improved on Q2 numbers. Revenue and profits were above analysts estimates (not that I care much).
The exciting news is the future possibilities, but first the core European online poker business Everest Poker had record results increased revenue 163% from a year earlier. What gets me excited is the Asian gaming side of the business is just getting started with slower than expected revenue streams for the quarter and the Japanese games including Pachinko will not get fully rolling until early next year. Adding to the future possibilities GIGM is teaming up with Electronic Arts (ERTS: 43.98 +0.36 +0.83%) to offer online versions of EA’s games to Gigamedia’s Asian customers.
GIGM is still a small, fast growing company. Revenues are under $200 million annually and market cap around $1 billion. I do not see any reason why this company cannot be a $1 billion revenue company soon. At a 50% growth rate that number comes in less than 5 years. Gigamedia’s stock is highly volatile as short term traders push the price around. At this point I see any price pull back into the teens as a buying opportunity (until it cracks $30!).
Note: Take a look at my 20 Stock Articles page to see earlier posts.
Note squared: I own shares in GIGM.
Aegean Seems Poised for Growth - WSJ.com
Aegean Seems Poised for Growth - WSJ.com
Subscription is required to the Wall Street Journal.com, but this is an excellent article on the prospects for Aegean Marine Petroleum Network (ANW: 36.06 +0.01 +0.03%). With the recent pullback in the price I finally purchased some of the stock for my own portfolio. This stock should be a big winner over the next 3 to 5 year or longer. I will be looking to add shares on any future price pull backs.
All my stocks are down! Panic time?
Not really. Like anyone who owns stocks and checks them regularly, the last week has been trying to say the least. I hold primarily smaller cap stocks and the value has fallen about 10%. So I take a look at the issues and try to see if I missed something that affects what I thought made them attractive in the first place. The answer is generally, no. I sold my position in (WSTG: 7.40 -0.18 -2.37%) after the quarterlies came out, but otherwise still like what I own and the stocks in my 20 Stock Portfolio (not completely the same).
As I have refined what I am doing on this blog and with my personal investing, I have developed a focus on finding stocks that are 2-5 year heros. I try to find stocks that I believe will double or better in that time frame. So if a stock is down 10% or 15% or more ((TMA: 0.1825 -0.0175 -8.75%)) from where I bought it, the longer term prospects remain intact.
(ELP: 19.86 +0.23 +1.17%) released earnings today. (GIGM: 10.71 +0.15 +1.42%) and (SFL: 27.88 -0.38 -1.34%) are coming in the next few days. I have raised some cash and looking for the best opportunity to add to my positions.
I wanted to write this post as a contrast to what I often see from stock analysts and the financial media, where they recommend “stock XYZ currently $25 with a target of $28 in the next 6 months”. That type of recommendation means almost nothing if the market goes down in mass. I am investing in stocks for longer term out sized gains, and that process definitely helps me weather market conditions like we have recently experienced.
Tanker stocks: Where from here?
This week I have been taking a closer look at what is going on with tanker stocks. This site’s 20 Stock Portfolio has two members in this class: Nordic American Tanker (NAT: 35.56 -2.51 -6.59%) and Ship Finance Ltd. (SFL: 27.88 -0.38 -1.34%). To me the appeal of the tanker stocks is the opportunity for out-sized dividend payments. Since the dividends of these stocks can fluctuate tremendously, the market tends to price them a very attractive yield.
NAT released their 3rd quarter earnings on Monday, reporting a small loss. This was not too unexpected because of previously reported very low charter rates and a letter from the CEO giving a head’s up. They did declare a 40 cent dividend, I think to keep their record of 10% plus annual yields intact.
Ship Finance has had little news outside of a share buy back program, but the stock has been flat and down quite a bit this week. It popped up today (11/8) over 6% with an strong upgrade from Citibank. I like SFL due to the steady dividend and having first call on the revenue of its leased ships. An 8%+ dividend that should grow makes a lot of sense to me.
From what I read there is slight over supply in the tanker business. High oil prices may get producing countries shipping more oil, a slowdown is the U.S. could reduce oil demand. Spot rates for oil tankers remain flat into the 4th quarter, so I am not looking for strong dividends in NAT for a couple of quarters. SFL has a more stable business model and I expect them do maybe have a few surprises over the next couple of quarters.
Unless some really good news comes across (isn’t that what we all are waiting for?) I expect some dips in the prices of (NAT: 35.56 -2.51 -6.59%) and (SFL: 27.88 -0.38 -1.34%). I think in the longer term (1 to 3 years) prospects are excellent. Here is a chart of the companies and Frontline (FRO: 63.83 -0.51 -0.79%), the largest tanker company.
Note: I own shares in SFL.
<a href=”http://finance.yahoo.com”>Yahoo! Finance</a><br /><a href=”http://finance.yahoo.com/q?s=FRO”>Quote for FRO</a>
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