Terra Industries Inc. (TRA) has reported 2008 4th quarter and full year results and the recent past was very good for the company (Call Transcript). I

Terra Industries Inc. (TRA) has reported 2008 4th quarter and full year results and the recent past was very good for the company (Call Transcript). I will take a quick look at how the company did and try to make a guess on what the future will bring.

First, for you income and Terra Nitrogen LP (TNH) fans, the company declared a distribution of $2.97 per unit. Shareholders for the entire 2008 earned $13.60 in distributions. Early in 2008 I recommended TRA vs. TNH when the net income distribution shifted in favor of the general partner, TRA. TNH shareholders are now getting $3.00 per share on the same income that a year ago would have earned them $4.50 (roughly). The current partnership agreement gives TRA about 40% of the net income off the top, then they pick up 75% of the distributions for the units they own.

For the 4th quarter TRA earned $1.65 per share, a 150% increase over the same quarter in 2007. The earnings were also in line with the $1.64 earned in the 3rd quarter of 2008. For the year TRA earned a record $6.20 per share, a 225% increase over 2007. According to Yahoo Finance the consensus estimate for the quarter and year were 92¢ and $5.52, pretty big misses. Revenue gains were made on higher selling prices as volumes for nitrogen, UAN and ammonia fell 12%, 16% and 30% respectively.

Going forward, this is what I see:

The biggest negative is that TRA’s product prices fell sharply at the end of the 4th quarter, forcing a $48 million writedown in inventories. The combination of lower sales volumes and lower prices could have a significant effect on the bottom line.

The positives list is a little longer: TRA idled a couple of plants when the global slowdown started cratering prices, allowing the company to do some needed upkeep and keep inventories under control. Natural gas, which is the major expense for the company, is at a 5 year low. Farmers skipped a significant portion of fertilizer application in the fall as fear of falling commodity prices took effect. They will need to make up those applications in the spring. Corn prices have recovered to about $3.80 from near $3.00 in December, and historically $4.00 corn is a very good number.

The earnings estimate on TRA for 2009 is about $3.00 per share. I believe the current pessimistic environment has that number at least $1.00 low. But at this point I really see Terra Industries as a value play with long term positive fundamentals. TRA has a market cap of $2.4 billion while it sits on $1 billion in cash and its 75% stake in TNH has a current value of $1.8 billion. TNH generates about 30% of TRA’s earnings. Also, at the end of Q3, TRA had $680 million in cash.

Although TRA has doubled from its recent low, I think 2009 will be a year of positive surprises for the company.