Terra Industries: Fertile Company in a Fertile Sector

Terra Industries, Inc. (TRA) is operating in the high-growth fertilizer sector, bearing the favor of strong demand and higher selling prices. But the company has been helping its own cause by cutting costs and increasing operational efficiencies, which helped it grow its profit to over $100 million last quarter, up from just $5.9 million in the same period last year. In addition, based upon projected full-year earnings, Terra's stock price looks undervalued, priced at a discount to the overall market.

Terra Industries, Inc. produces and sells nitrogen and methanol products for agricultural and industrial markets both domestically and internationally. The company was founded in 1964, carries a market cap. of $4.35 billion and is headquartered in Sioux City, Iowa.

Agricultural Production Is Under Pressure

With the recent rash of floods and storms across the Midwest damaging the production capacities of the agricultural sector, the already lean supply side has suffered a substantial hit. Previous to these developments, producers had already been scrambling to boost their yields in order to meet growing domestic and global demand, frequently turning to fertilizers and nutrient additives to accomplish this objective. In turn, fertilizer companies profits have been soaring.

Another Solid Quarter

Terra's first-quarter results, reported on Apr 24, are in line with this trend. Revenue for the quarter was up over 14% from the same period last year, to $574.7 million. Net income sky-rocketed, up to $100.2 million from $5.9 million in the same period last year. This produced earnings of 97 cents, easily trumping the consensus estimate of 89 cents.

Cutting Costs

Terra benefited from surging demand and higher selling prices, but the company also helped its cause by being frugal and cutting expenses. The company's cost of sales dropped to $407 million from $422 million. This helped boost the company's operating income to $168 million from just $67 million in the same period last year.

Estimates Are Rising

Analyst estimates have been on the rise, in accordance with the continued impressive results of the entire industry, including Terra. Within the last 90 days, the current-year estimate has advanced to $4.50 per share from $4.20 per share.

Based upon these earnings projections, this stock looks like a bargain, carrying a forward P/E multiple of just 10.5X.

In spite of the fundamental strength, shares of TRA have been mostly range-bound in 2008. Having said that, this stock is once again pressuring its upside resistance level just short of $50. Importantly, over the last two months, shares of TRA have been logging higher lows when retracing to the bottom half of the trading channel. This is a bullish signal. Throw in the low valuations, and this stock looks very well positioned, both fundamentally and technically, to advance beyond short-term resistance and accelerate into higher territory.