Why I am negative about nitrogenous fertilizers (Part 11 of 11)
Trailing enterprise-based valuation
Sometimes it helps to see whether the market is looking at the past or the future. After all, there’s a set group of people who will just purchase shares based on historical performance. Besides, for companies like Terra Nitrogen Company LP (TNH), in which few (or no) analysts provide forward-looking estimates, perhaps the best valuation ratio we can use is trailing (over the past 12 months).
Valuation multiple likely to stay low
Looking at the past five years of enterprise-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratios for the three companies shown above, valuation for CF Industries Holdings Inc. (CF) has consistently been lower than Agrium Inc. (AGU) or Terra Nitrogen Company (TNH). Agrium’s valuation has consistently been higher than CF Industries’ because its business is much more diversified, with operations in retail as well as some potash and phosphate. Terra Nitrogen Company LP (TNH), on the other hand, is a master limited partnership. This means the business’s earnings aren’t subject to corporate federal or state taxes. Instead, they’re only taxed when individuals receive them as dividends, which makes them more valuable.
The above chart also shows that current valuation is lower than the average of the past five years for all companies. But it’s important to consider that valuations are often low when the forward outlook is dim, as they were in late 2008 and early 2009. When the outlook is high, valuation tends to be high as well. So it isn’t surprising that the current enterprise to last twelve months of valuation is below the five-year average.
Terra Nitrogen Company could see a sales decline of 20%
If 2014′s selling prices of UAN (a type of nitrogenous fertilizer) and ammonia for Terra Nitrogen Company LP (TNH) do fall about 20% from 2012 (which was basically where they were for the first half of 2013), net income will likely fall by ~25%. This would send the trailing valuation for a few months from today higher than the historic average. But the more likely scenario is for the trailing valuation multiple to stay low as the market notices falling earnings and continues to sell, switching to something better (hopefully).
Dividend cuts and a share price fall for Terra Nitrogen Company
The current dividend yield for Terra Nitrogen Company LP (TNH) stands at ~8.0%. But that’s based on historical dividends of $16.86 a share. For master limited partnerships, these dividends can change quickly depending on earnings. So if earnings are to fall to something like $12 a share, dividends will also fall ~25%. Since 2009, the dividend yield has averaged 7.65% for the company. With the current dividend yield above the historic average, a decline in dividends will likely translate to lower share prices. Investors looking to invest over the next year could still face negative returns even if they receive dividends.
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