NTR - Intrepid Potash: Why I Called It A Day (Rating Downgrade)

2023-06-22 13:12:40 ET

Summary

• Intrepid Potash, Inc. hasn't performed as expected, leading to a cautious stance on the stock despite its current low price.
• Potash prices have continued to decline, debunking the belief that they would rebound after the Russian invasion and challenging the narrative of limited potash exports.
• Comparables with the previous year present challenges, and it remains uncertain whether 2024 will offer meaningfully better prospects for Intrepid Potash.
• Altogether, I'm neutral this name.

Investment Thesis

Intrepid Potash, Inc. ( IPI ) held a lot of promise last year. But the events didn't work out as I expected .

Yes, today Intrepid is selling extremely cheaply. But until there are clear and concrete signs of a potash recovery, I don't believe it makes sense to get bullish on Intrepid Potash.

Rapid Recap

Intrepid is a stock that I was very bullish on. But things took an unexpected negative turn and I was forced to recommend exiting my position on 26 April , at $25 per share. I didn't want to risk holding my recommendation into the earnings print.

I said to Deep Value Members,

As I've discussed a lot in the past year, the mistake I made with potash was that I believed that potash prices would firm up, on the back of the Russian invasion.

This turned out to be false.

In hindsight, this turned out to be a good idea. But even better hindsight would have been not to get involved in the first place.

So, what do investors have to think about now?

What's Next For Intrepid Potash?

There are two main reasons why I'm now neutral on this stock right now. In the first instance, the comparables with last year will be challenging and will not let up until Q4 2023.

Hopefully, in 2024, Intrepid will have a better year, but it's hardly worthwhile getting bullish now for something that may be more alluring next year. The key word here is may .

While the second reason is that for all the narrative that everyone had about Russia/Ukraine not being able to export potash volumes to the West, this turned out to be categorically false.

And by extension, the underlying thesis that farmers could defer replenishing their inventory for one year, but after the second year they'd be back aggressively, also turned out to be incorrect.

Here's a myth-busting fact:

The price of potash continues to trickle lower. We can attempt to say whatever we wish, such as, that the bottom must be near and hold a passionate vision to that effect. But sadly, the facts are the facts, and right now, potash prices do not appear, at least to me, to be moving higher fast.

Perhaps, I should rephrase this in this manner. I had a view in 2022 that by 2023, farmers would be tripping over themselves and buying up a lot of potash to replenish the lost nutrients from their soil. And it turns out to be a lot more complicated than this.

I already discussed this when I wrote about Nutrien Ltd. ( NTR ). Here's a quote from the earnings call :

We have adjusted our production plans accordingly and will maintain a flexible approach to our potash ramp up basing the timing of capital expenditures with the expected recovery in demand.

Essentially, Nutrien believes that at some point the potash market may firm up, but for now, they too remain cautious over potash's prospects.

Other Considerations That Keep Me Neutral on Intrepid Potash

If I wanted to buy into the potash theme, which I don't, but if I wanted to buy into the potash story, I wouldn't return to choosing Intrepid Potash.

In the future, if I'm going to buy into potash (note, I do own CF Industries ( CF ) that makes nitrogen, so I'm not against the idea of investing in fertilizer), I would buy into either Nutrien or Mosaic ( MOS ). They are truly world-class companies, with world-class assets.

Essentially, this is my thought process.

If we look back to 2022, arguably the best near-term year for Intrepid, its gross margins were approximately 45%. That's it, that's as high as this business' gross margins are likely to go.

And what about the most recent quarter? The gross margins fell to less than 20%. Basically, Intrepid is a business that simply doesn't have enough scale to overcome its high fixed costs.

Note, I'm not saying that it's impossible for another black swan to happen, as it did in 2022, where Intrepid's gross margins could jump higher and this business starts to ooze free cash flow, but I don't want a buy-and-hope investment strategy.

The Bottom Line

Intrepid Potash initially showed promise, but the outcome didn't align with my expectations. While the stock is currently attractively priced, I remain cautious until there are clear signs of a potash recovery.

The belief that potash prices would firm up after the Russian invasion turned out to be false, and the narrative of limited potash exports from Russia/Ukraine was proven incorrect. Potash prices continue to decline, and the thesis that farmers would aggressively replenish their inventory also hasn't materialized.

Furthermore, comparables with last year will pose challenges, and it's uncertain whether 2024 will bring meaningfully better prospects.

Intrepid's gross margins have been limited by its lack of scale and high fixed costs, making it difficult to overcome these challenges. While another unexpected event could potentially turn things around, I prefer not to rely on a speculative investment strategy. Given these factors, I am now neutral on Intrepid Potash, Inc. stock.

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