Among the fertilizer companies about to announce their quarterly reports, one I am particularly looking forward to hearing about is CVR Partners LP (NYSE:UAN). The stock started the year with a bang, but is deep in the red now. After rising more than 10% in the first three weeks of January alone, CVR’s shares gave up 14% gains in the past three months.
Macro concerns have hit the fertilizer industry hard, yet several factors suggest that 2013 could turn out to be a good year for CVR investors. The small fry is set to report numbers next week, and if its first quarter lives up to expectations, it could also signal the beginning of a fresh rally for the stock.
High expectations
Given that CVR deals in the most widely applied nutrient, nitrogen, and the first quarter coincides with the peak fertilizer purchasing season in the U.S., I think CVR has a good chance to trample Street estimates on the top line. CVR had already pre-booked orders for nearly all of its expected urea ammonium nitrate (UAN) production for the first quarter. UAN made up 80% of its sales in the fourth quarter, so sales volumes shouldn’t be an issue. The only squeeze could be UAN prices, which are trending lower from where they were same time last year. Yet CF Industries Holdings, Inc. (NYSE:CF) remains optimistic about the UAN market going forward. As the largest North American producer of nitrogen, what CF says matter.
CF expects prices of UAN to pick up from the second quarter as slow domestic production is resulting in tighter supply conditions in the industry. UAN was the highest selling nutrient in terms of volumes for CF in its last quarter — it made up 46% of its total sales volumes — and the company is planning to convert larger amounts of ammonia produced to UAN this year. This indicates the profit potential of the nutrient, which is definitely great news for CVR Partners LP (NYSE:UAN) as it aims to convert 100% of ammonia to UAN beginning this year.
Set to outperform peers?
What investors should look out for next week is whether CVR translates its incremental sales to higher profits as successfully as analysts expect. The projected EPS growth of 15% looks achievable. How, you may ask, given that nitrogen fertilizer consumes large amounts of natural gas as input and gas prices have risen rapidly in recent months? The answer lies in CVR’s uniqueness.
CVR is the only North American company that uses petroleum coke instead of gas as feedstock. Until late last year, coke prices were on an upward trajectory, while gas prices headed south. This was the reason behind CVR Partners LP (NYSE:UAN)’s falling profits even as peers CF Industries Holdings, Inc. (NYSE:CF), Terra Nitrogen Company, L.P. (NYSE:TNH), and Rentech Nitrogen Partners LP (NYSE:RNF) reported robust growth in their bottom lines. But the tables are turning.
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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