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Author: kassabianspeed Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 39  
Subject: Still undervalued after great quarter. Date: 2/10/2008 6:09 PM
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This past week, THN reported their 4Q and FY 2007 earnings and blew the estimates away. It is still the sexiest fertilizer story out there with the strongest fundamentals across the board. Here are some interesting facts tying the ag story to THN's future prospects:
-TNH is almost the only fertilizer stock with NO debt. The avg debt of the big three (POT, AGU, MOS) is $1 Billion! Even its parent company TRA has 300 million in debt.
-It is the only fertilizer with a distribution. This quarter they paid out $4.45 a share. More on the distribution later...
-Highest quarterly Revenue gain in percentage terms (see IBD Mon Feb 11 2008 pg.A20).
-Highest Return on Equity of the Ag/Fertilizer (see IBD Mon Feb 11 2008 pg.A20).
-Highest pretax margin of the Ag/Fertilizer sector (see IBD Mon Feb 11 2008 pg.A20).
-The lowest PE ratio of any fertilizer or Ag stock out there!
-It takes 5 years to open a new plant and have all its production in the heart of the corn-belt like TNH.
-Seeing how it has the highest distribution (some may call it a yield/dividend) of any fertilizer stock in an low interests rate environment, TNH will still provide for a higher return than any or bond could.
-The stock along with the sector is off its highs going into a year where fertilizer demand will be just as robust as last year, makes TNH look ever cheaper.
-Also, with heavy importing of Liquid Natural Gas (LNG) expected this year, TNH stands to recognize lower Natural Gas expense. Nitrogen fertilizer companies largest expense is natural gas and TNH is no different, this is very bullish for the companies margins.
-With the U.S. heading into a recession or slow down or whatever you want to call it, Natural gas prices will fall. Natural gas was 1/3 of its current price during the last recession.
-Even during a recession people still need to eat even in an environment with low grain stocks worldwide, high grain prices, a robust global market for nitrogen, and high food demand, TNH stands to benefit.

Distribution
Now in terms of the distribution (TNH is still the only one that has one) the pay out structure is about to change if TNH stands to pay out more than $2.45 in next quarter. It will go from paying out unit holders 99% to paying out 50% of the value (You can refer to their 3Q 10-Q for the latest payout structure seeing how their 4Q 10-Q and 10-K is not available yet). Now at first this may seem bearish, but you have to consider where THN has been, where it is, and where it can go.
1)TNH will always have a minimum payment to unit holders of 0.605 per unit.
2)The split only reaches the 50/50 threshold when the company makes a significant amount of money (take into consideration that the Ag and fertilizer stocks are hitting new highs and will continue to be reflected in the coming quarters. Just look at the double, triple, and quadruple in upcoming quarterly earning projections. See IBD Mon Feb 11 2008 pg.A20).
3)If the company makes $16 per unit in 2008 (conservative estimate) the worst case scenario would be a payment of $8 to unit holders. Considering that the stock hit $168 in the early part of 2008 and using $8 per unit as the worst case scenario makes TNH is undervalued at its current levels (Earnings per unit were $10.90 for FY 2007, if earnings grow only 50% that would be $16.35 earnings per unit. Half of that is $8.175). I say this is a conservative estimate because earnings per unit from 2006 to 2007 grew by over 3X!!!
4)Understand the conservative estimate, earning growth projections of its peers, low interest rate environment, good chance of lower natural gas costs, and a booming agricultural phenomenon around the globe.

For the Shorts out there:

-The float is 25% of outstanding, of which 9.3% of that is held by institutions, and 3% shorted. That makes for an extremely thin float.
-Every Quarter, the shorts have to pay out the distribution, making it painfully expensive to be short this stock.
-It is a hard stock to borrow for the above mentioned reasons, and you are charged a high borrowing fee.
-My broker told me to transfer all my shares from my Margin account to my Cash account. This will make it nearly impossible to short the stock further and will result in the short stock out there being called in.
-Any kind of short covering will easily add upside to THN stock with such a thin float.


Bottom Line
Even if TNH had no distribution (hard to believe since you will still receive the 0.605 per unit minimum) it would still be the cheapest ag stock with the lowest PE and best fundamentals in the industry.

I recently started a Long position in the company after reviewing their quarter and yr end results. I will continue to accumulate.
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