Two views of Terra Nitrogen (TNH) VALUE or INVESTMENT?

Terra Nitrogen (TNH)

Market price: $110.75

Shares: 18.5 million

Dividend yield: 4.9%

Quarterly dividend: $1.36

Book value: $11.35

            EPS                   Net inc.             Adj. EPS

2006     $2.45                $45.73 M           $2.47

2007     $10.90              $205.782 M       $11.12

2008     $14.90              $422.385 M       $22.83

2009     $5.40                $100 M              $5.41

2010     $8.01                $148.2 M           $8.01

At first glance Terra Nitrogen appears to be a VALUE investment trading 11.1 times its 5 yr. average earnings.

Five year average earnings $9.97

12 times five year average earnings = $119.64

20 times five year average earnings = $199.40

If you believe that the last 5 years are more representative of Terra Nitrogen’s future performance, then TNH is a value at $110.75 per share.  However, the numbers change if you take a 10 year view of Terra Nitrogen.

Ten year average net income: $108.3 million

Ten year average earnings per share: $5.85

12 times ten year average earnings = $70.20

20 times ten year average earnings = $117.00

Terra Nitrogen is trading at 18.93 times its 10 yr. average earnings.  This is in the INVESTMENT basis range, and at nearly 20 times 10 yr. average earnings it is almost SPECULATIVE.

I like to take the longer term view when possible to be conservative.  I would buy TNH below $70.20.  It was priced below $70 in June 2010.  The stock has been on a large run since June 2010.  By waiting for a correction you can get a better dividend yield, the price to book value would be improved, and the price relative to earnings would be in the VALUE range.

Disclosure: I don’t own Terra Nitrogen (TNH).

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