NTR - CVR Partners: Lower Distributions But Undervalued Compared To Its Peers (Rating Downgrade)

2023-08-29 17:00:24 ET

Summary

• CVR Partners' 2Q 2023 financial results were weaker than expected, resulting in a lower-than-expected available cash for distribution.
• Sales volumes for ammonia and UAN were strong in 2Q 2023, but prices decreased significantly.
• Despite the drop in stock price, CVR Partners' profit margin and return on equity are higher than its peers, making it an attractive investment.
• I estimate CVR Partners' 3Q 2023 cash distribution to be between $2.4 to $3.3.
• I calculate a 1-year dividend yield of between 10% to 13% for CVR Partners.

Introduction

After my previous article on CVR Partners ( UAN ) was published (with a strong buy rating) on 17 June, the stock price increased by more than 13%. However, fertilizer prices decreased at a faster pace than I expected. Also, as the management decided to increase the cash in hand, the deductions from EBITDA were higher than my estimation, resulting in a lower-than-expected available cash for distribution. Thus, CVR Partners' cash distribution in 2Q 2023 was lower than my estimation. UAN stock price decreased from $93 on 31 July to $74 on 29 August. According to lower fertilizer prices, and higher deductions from EBITDA, I estimate CVR Partners' cash distribution in 3Q 2023 to be between $2.4 to $3.3. But, it is obvious that with the current fertilizer prices, CVR Partners' financial results are not going to be as strong as in the previous quarters. The question is whether CVR Partners is still worth buying or not (based on the new market conditions and the stock's current price). To answer this question, after projecting the company's cash distribution in 3Q and 4Q 2023, I compare CVR Partners with other fertilizer stocks. My analysis shows that in the past few months, CVR Partners' stock price suffered more from lower fertilizer prices than its peers. However, the ironic thing is that the revenue of CVR Partners didn't decrease as fast as its peers. CVR Partners' stock recent drop caused its EV/EBITDA to drop below the average EV/EBITDA of its peers, making a good entry point. However, be mindful that I am not as bullish as I was on CVR Partners a few months ago, and I downgraded my strong buy rating on the stock to buy.

Investment thesis

In its 2Q 2023 financial results, CVR Partners reported weaker-than-expected financial results. In my previous article on UAN, I estimated the company’s available cash for distribution to be more than $66 million as I estimated its net sales to be between $183 million to $209 million. UAN reported a 2Q 2023 net sales of $183 million, consistent with the lower bound of my estimation. However, as the company’s cost of sales was higher than my estimation, UAN’s EBITDA in 1Q 2023 was lower than I expected. Also, I estimated its 2Q 2023 distribution per common unit to be more than $6.2. It is worth noting that UAN’s deductions from its EBITDA in 2Q 2023 were higher than my estimation as the company increased its cash reserve for future operating needs.

In the second quarter of 2023, CVR Partners' ammonia and UAN sales volumes were strong. The company sold 79 thousand tons of ammonia, compared with 52 thousand tons in 2Q 2022 and 42 thousand tons in 1Q 2023. Also, the company sold 329 thousand tons of UAN, compared with 287 thousand tons in 2Q 2022, and 359 thousand tons in 1Q 2023. “As we enter a new planting season, nitrogen fertilizer prices have fully reset and we have seen strong demand for the second half of 2023,” the CEO commented. “Our focus for the remainder of the year will continue to be on safe, reliable operations and maximizing our free cash generation and cash distribution,” he continued.

In the second quarter of 2023, the problem was lower prices as the company’s UAN pricing at gate decreased from $457/ton in 1Q 2023 to $316/ton in 2Q 2023. Also, CVR Partners’ ammonia pricing at gate decreased from $888/ton in 1Q 2023 to $707/ton in 2Q 2023. Now, Urea's price has dropped below $600 per ton, the lowest since September 2021. Also, UAN28 and UAN32 prices decreased significantly in the past few weeks (see Figure 1). As of June 2023, ammonia prices in the United States for the second half of the year were expected to be between $0.95/kg to $0.99/kg. However, now, ammonia prices in the United States are expected to be about $0.70/kg for the remainder of the year (see Figure 2). Thus, I calculate CVR Partners’ product pricing at gate in 2H 2023 to be 30% to 35% lower than in 1H 2023, representing a higher gap compared with my previous estimation. However, the company’s ammonia and UAN sales volume can remain high.

I estimate CVR Partners’ UAN average quarterly sales volume in 2H 2023 to be between 320 to 340 thousand tons. Furthermore, the company’s ammonia average quarterly sales volume in 2H 2023 can be between 70 to 90 thousand tons. Projecting the company’s 3Q, and 4Q 2023 net sales, EBITDA, and available cash for distribution, and assuming quarterly deductions from EBITDA of $40 to $45 million, I calculate CVR Partners’ available cash for distribution and distribution per common unit in 3Q 2023 may be between $26 to $35 million, and $2.4 to $3.3, respectively. Also, the company’s available cash for distribution and distribution per common unit in 4Q 2023 can be between $22 to $30 million, and $2.1 to $2.9, respectively. As fertilizer prices in the first half of 2024 can be lower than in 2H 2023 (based on the current market condition and economic outlook), at prices around $74 per share, I calculate CVR Partners 1-year forward distribution yield to be between 10% to 13% (see Figure 3).

Figure 1 – Fertilizer prices

Figure 2 – Ammonia price outlook

Figure 3 – Estimation of UAN’s 3Q and 4Q 2023 financial results

A dividend yield of more than 10% is attractive. However, it is not wise to buy a stock for a 10% dividend yield if its price is going to drop. Thus, it is very important to realize if CVR Partners’ stock is overvalued at its current price or not. According to Figure 4, CVR Partners’ diluted EPS decreased in the past two quarters significantly; however, we can see that the diluted EPS of its competitors decreased more. On the other hand, we can see that CVR Partners’ stock price dropped more than its peers since the beginning of the year. In simple words, in the past eight months, CVR Partners suffered less from lower fertilizer prices than its competitors, and at the same time, its stock price decreased more than its competitors. Moreover, according to Figure 5, as CVR Partners’ stock price decreased more than its peers in the past eight months, its EV/EBITDA is now lower than the EV/EBITDA of Nutrien ( NTR ), intrepid Potash ( IPI ), and The Mosaic ( MOS ). We can also see that CVR Partners’ EV/EBITDA at the beginning of the year was higher than its peers.

Figure 4 – CVR Partners’ diluted EPS and price changes vs. peers

Figure 5 – CVR Partners’ EV/EBITDA vs. peers

CVR Partners’ profit margin is higher than its peers. According to Figure 6, we can see that the company has a profit margin of more than 30%, while the profit margins of its competitors range between 8% to 27%. Also, CVR Partners has a higher return on assets (ROA) and higher return on equity ((ROE)) compared to its peers. According to Figure 7, CVR Partners has an ROE of 60%, while the ROE of its peers ranges between 3% to 47%. Also, the company has a ROA of 22%, which is higher than the ROA of its competitors.

Based on CVR Partners and its peers’ stock price changes in the past eight months, and their EV/EBITDA, ROE, and ROA, my conclusion is that CVR Partners’ stock price drop in the past eight months has been consistent with the market condition and the performance of its peers; however, the stock’s price might stop decreasing further as compared to its peers, UAN is undervalued. As a result, I’m not worried about lower stock prices in the following months. Thus, the company’s dividend yield of more than 10% seems attractive.

Figure 6 - CVR Partners' profit margin vs. peers

Figure 7 - CVR Partners' return on equity vs. peers

Why I might be wrong

Before 2021, Ammonia and UAN prices were lower than their current levels, and due to the pandemic and the war in Ukraine, fertilizer prices jumped. In 2023, fertilizer prices started getting back to normal levels; however, they are still higher than their traditional levels. The war in Ukraine is still going on, and its effects on fertilizer prices are still partly standing. However, if for any reason (like changes in geopolitical conditions or financial instabilities) the demand for fertilizers drops, UAN’s ability to pay distribution can get hurt materially, and the stock’s price might decrease further. Thus, it is important to keep an eye on fertilizer prices if you want to take a buy position on CVR Partners.

End note

CVR Partners’ 2Q 2023 financial results were weaker than my expectations, and the stock’s price drop represents its lower dividend yield compared with a few months ago. I estimate CVR Partners to distribute $2.4 to $3.3 per common unit for the third quarter of 2023, and at its current price of around $75, I estimate its 1-year dividend yield to be more than 10%. Also, compared to its peers, CVR Partners is in a good position. The stock is a buy.

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