From TradingMarkets.com: Atlas Pipeline Holdings Q1 net loss widens

From WSJ.com: Atlas Pipeline Partners’ 1Q Loss Narrows; Volume Up

It seems that investing on the headlines can be confusing. This is why you need to understand the underlying financial fundamentals of stocks you are interested in. Right now I think APL’s stock value is much less than the value of the assets it holds and the stock can move significantly higher from this point. This is tough to swallow on a stock which has lost 80% of its value in the last year.

My point is that if you want to invest in individual stocks do your own research. Another point is that if the “experts” can disagree so much, a smart individual should be able to find ways to profit against the herd.

I started following Headwaters a little over a year ago as they started working their business plan to generate new revenues as the proceeds from their Section 45K clean energy business wound down when the section of the tax code expired. They have been working on transferring their clean energy technology to the building of facilities that process waste coal into usable/salable high quality coal. The fall in energy prices, the housing crash and the general economic slowdown have had significant impact on Headwaters’ three major business lines, slowing the companies return to strong profitability. Here is a quick outline of their major business lines:

Building Materials: Headwaters manufactures and sells block, stone and other building materials used primarily in new home construction and remodeling. Revenues for this business declined 17% from the same quarter a year earlier and accounted for 53% of total sales. HW has been aggressive in bringing out new products and cutting costs in building materials, but this segment will struggle until new home building starts to rebound.

Coal Combustion Products: Headwaters processes fly ash from the burning of coal in electricity generating plants and sells the end product as and additive to Portland cement use. The fly ash HW sells results in stronger concrete and significantly reduces the amount of CO2 produced related to new concrete construction. About 25% of the segments revenues are from service contracts with power generators. These sales could grow significantly if government infrastructure spending increases along with the current administration’s emphasis on reducing greenhouse gases. In the last quarter 40% of HW’s revenues were from this segment.

Energy: For a little over one year Headwaters has been ramping up their coal cleaning operation. They now have 11 facilities in operation at various stages of ramp up. When fully operational these facilities will be able to clean 5 million tons of coal per year. In the quarter HW sold 336,000 tons of coal compared with 85,000 tons sold a year earlier. Merchant coal sales (excluding tolling sales) increased 9-fold, year over year. With cutbacks in steel production the higher value metallic coal market has disappeared for Headwaters and they are currently primarily selling steam coal. Energy sales accounted for 6.4% of revenues in the quarter.

In tolling, a power marketer (or fuel supplier) contracts with the operator of a generating plant to convert the power marketer’s fuel into electricity, which is delivered over a transmission line to an agreed-upon location. The generator does not take title to either the fuel or the electricity, but is paid a tolling fee for its services.

Headwaters’ revenues are slowest in the last and 1st calendar quarters of the year and analysts are projecting a loss for the next quarter. Management is projecting earnings for all of 2009 at between 35¢ and 70¢ per share. The wide range is due to the uncertainty of the timing of recoveries in the housing and energy sectors. At this time Headwaters is a company with several lines of business that should thrive when infrastructure spending and home building start to increase. The question is how long will the company and investors have to wait until that day arrives. At this point I think the stock would be interesting to investors with at least a 2 year time frame.

Note: HW is a component of this site’s Opportunities Portfolio and a personal holding.

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Terra Industries weighs $2.1B takeover bid: Financial News – Yahoo! Finance.

This bid by CF Industries (CF: 187.42 0.00 0.00%) sucks for Terra Industries (TRA: 0.00 N/A N/A) shareholders. I think the stock is grossly undervalued. I wrote here that TRA had a valuation problem when you look just at the company’s cash holdings and the value of their stake in Terra Nitrogen (TNH: 200.00 0.00 0.00%). The market values the non-TNH part of Terra’s business, which generates 70% of their revenues at less than zero.

I do see a couple of positive’s in this bid:

• First, it puts TRA in play and may end up pushing the stock back up to a reasonable level.

• Second, if the purchase does go through, shareholders will end up owning shares of CF, which is in the same industry.

This was a smart move by CF to try to pick up Terra’s assets on the cheap. Let us hope this bid starts a bidding war and the shares continue to appreciate.

Note: TRA is a component of this site’s hypothetical Opportunities Portfolio.

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TNH has been popular with investors due to their high quarterly distributions. The company is a limited partnership that pays out the majority of the earnings of a single nitrogen plant in Verdigris, OK. Earlier this year, I wrote an article on the changes in TNH’s income payout that were of increased benefit to the GP and decreased the cash available to the common unit holders. The market has paid little attention to my analysis as TRA stock has fallen by 65% from when the article was written and TNH is off only 35% and shareholders have picked up $10.63 in dividends.

Let us look at the value divergence between the two Terras. Terra Industry’s 75% stake of TNH is worth $1.27 billion at current values. If the GP (wholly owned by TRA) collects 40% of Terra Nitrogen’s income before any distributions are made, let us value the general partnership of TNH at say $430 million (40% times $1.7 billion with a 1/3 knocked off as a fudge factor). This gives Terra Industry’s holdings in Terra Nitrogen a total value of $1.7 billion, $300 million more than TRA’s entire market cap.

TNH revenues are consolidated into the TRA income sheet and for the 3rd quarter TNH generated 31% of Terra Nitrogen’s total revenues. So the market is giving 69% of Terra Industry’s business a value of negative $300 million. Oh, and did I mention, TRA is sitting on $680 million in cash, half of the current market cap.

I know the short term future of fertilizer companies is considered bleak by many, but this current valuation of TRA is ridiculous. A couple of points to consider: Currently, Terra’s cost of natural gas is $4 to $5 less than their international competitors in Europe and the Ukraine. Low natural gas prices (the main component of nitrogen production) will allow TRA to maintain excellent margins even at significantly lower fertilizer prices. U.S. farmers will still plant a minimum of 85 million acres of corn next year and world demand for grains will continue to grow as populations increase. The dollar strength argument against grain exports seems a little weak since corn prices have fallen by 60% from their springtime peak and the dollar has rallied only 25% to 30%.

I am not sure the market will give up on the beating up of fertilizer stocks soon. I just wanted to point out that the current belief as reflected in the share price of Terra Industries may be very misguided.

Note: TRA is a component of this site’s hypothetical Opportunities Portfolio.