Henry hub gas prices have more than doubled since last year. This means higher input costs could put a wrench to margins of all the three companies mentioned above in their first quarters. The markets are wary of rising cost for these companies as reflected in the recent sharp falls in stock prices. CF’s stock has lost 20%, Terra is down by 16%, and Rentech’s shares nosedived 23% in the past three months (as of this writing). Each of these companies will be out with their quarterly reports over the next two weeks. So do the Street estimates reflect the concerns of cost pressure as well? Yes, they do. Analysts see CF’s first-quarter EPS falling by 1%, while Rentech Nitrogen Partners LP (NYSE:RNF) is expected to deliver 4% lower EPS year over year. Projections for Terra Nitrogen Company, L.P. (NYSE:TNH) are not available, but as a subsidiary of CF, its performance is closely tied to that of the parent.
So CVR looks better off than all these companies for now. It paid $30 per ton for pet coke in the fourth quarter compared to $40 per ton in Q4 2011. That helped CVR rake in a good gross margin of 53% for 2012, though it was down four percentage points from 2011. If coke prices continue to fall, CVR Partners LP (NYSE:UAN)’s margins should inch up.
Key elements to watch out for
Two key updates investors should be looking for in its upcoming earnings call is the status of CVR’s expansion programs — whether its recently expanded UAN plant has started operating at full capacity, and whether its diesel exhaust fluid (DEF) capacity expansion is on track. DEF is a huge opportunity as auto makers scramble to comply with stringent emission standards. While Rentech is adding 15% additional DEF capacity this year, CVR is aiming at multiple times higher capacity by the end of the year.
Along with these updates, I’d keep a close eye on CVR’s cash flow situation. If CVR decides to go for additional debt to fund growth, it could get worrisome since the company’s free cash flow plunged by more than 50% last year. That could also affect its future dividends. In comparison, Terra is debt free and still maintains a handsome dividend yield of above 7%.
Foolish takeaway
CVR’s payout last year was hurt by plant turnarounds, but with no such outages scheduled for 2013, you can count on your dividend checks. Earlier, CVR Partners LP (NYSE:UAN) projected a payout between $2.15 and $2.45 per share for 2013, which is a substantial jump over $1.81 per share paid last year. If the first quarter turns out to be really good, CVR might upgrade its outlook, which should help its shares revive. Keep watching this space for details on CVR’s numbers and future plans. If you do not want to miss any news, updates and analysis on the company, click here to add CVR Partners to your stock watchlist.
The article 1 Stock to Buy Before Earnings originally appeared on Fool.com and is written by Neha Chamaria.
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