2023-04-17 08:58:48 ET
Summary
- Intrepid Potash might have been able to increase revenues at a fast rate YoY, but I think there is a chance the future won't be as easy as some.
- The potash market is poised for growth and should see steady demand for many years forward.
- But I want to see some more consistency from the company before I rate them a buy, until then, I see potential and a hold rating seems fair.
Investment Summary
Intrepid Potash, Inc. ( IPI ) is an American company that specializes in producing and selling potash and langbeinite products. They have three main segments, namely Potash, Trio, and Oilfield Solutions. The company's logistics network is quite impressive as it has its own transportation and distribution infrastructure to support its operations. This established network and business model helped fuel a lot of growth in 2022 for the company. They managed to achieve a 26% revenue increase YoY. But the company has, despite that, seen a severe decrease in the share price. Perhaps for the best as in early 2022, it might have actually been quite overvalued. The outlook looks shaky as no one knows how the industry will be affected by increased demand for fertilizers and whether companies can manage to keep the same margins or increase them. This unclear outlook leads me to rate the company a hold for now. The valuation seems low but earnings estimates aren't looking too good, so a more careful approach to the company seems fitting.
Market Outlook
I think that the war in Ukraine has really highlighted some of the cracks in the food system that we have right now. It caused some commodities to spike in price as they became scarce. This is where companies like Intrepid Potash Inc have seen a lot of demand from. With their product, they help establish a more efficient way of growing and harvesting a variety of foods. It's becoming more clear how vital this is for our society.
Market Outlook (Mordor Intelligence)
In a report by Mordor Intelligence , they anticipate the market for potash to grow around 5.6% CAGR between 2023 and 2028. I think this growth will definitely be noticeable in IPI. They have already been able to grow substantially, and I don't think the growth will be slowing down. In the last earnings report , the management remained sturdy on what their priority for 2023 was, "The strategic focus for our growth capital is to help ensure our potash solar solution mines have more reliable, high-quality brine to help reduce production variances that may result from factors outside of our control, such as weather. We believe that the best use of our capital in 2023 is investing in our core potash assets to bring production closer to our productive capacity". I think this is a very healthy mindset to have, and it will do them very well to focus on getting production even more up to speed.
Demand is there, and it's now time to as quickly as possible try and satisfy that demand and build up a strong financial position which they then can leverage in the future when demand might dwindle. Some tailwinds like an increase in "winter wheat seedlings and corn acres" could help drive up the demand for fertilizers as farmers seek to make sure they have satisfying harvests while demand is high.
It will take decades to properly establish reliable food solutions. What might create some issues would be commodity prices seeing price decreases. In 2022, we saw them very correlated with the demand for fertilizers. A decrease in prices for corn, wheat, or palm oil could directly affect the CAGR expected. As the company grew around 21% YoY in 2022 it beat out the market's CAGR and I think the ceiling hasn't been reached as the fertilizer market is still dominated by The Mosaic Company (MOS) with around 60% share. So I think there is expansion available for IPI which can drive a higher yearly growth rate than the overall potash market yearly 5.6% growth rate until 2028.
Risks
With companies like Intrepid Potash, Inc., I think one of the major risks is valuation getting out of hand. Companies in the sector saw a surge in share prices as the demand for their product become even more evident to investors. But I think IPI has managed relatively well, their share price might have plummeted almost 75% in the last 12 months and reached a more realistic level now instead.
So instead of valuation being an issue, there are some actions the company did during 2022 which I think were irresponsible. They repurchased shares for around $22 million, with an average price of around $36 per share. You might notice that is far above the current one. I think it is important for companies to make financially sound investments, and buying back shares when the valuation isn't supported fundamentally worries me a little. I think that it would have been better to save and use the cash to invest in new mines to gain even more product availability.
Financials
Intrepid Potash Inc.'s balance sheet shows a total asset of $794.2 million, up from $766.9 million in the previous year. Its current assets increased by $14.8 million to $171.7 million, mainly due to a significant increase in inventory by $35.9 million. I think that despite the increase in total assets, there are still some things I'd like to have seen instead. For instance, the capital used for buying back shares at a rich valuation could have better been spent keeping the cash position from falling YoY. In the current climate, it's difficult for companies to take on cheap debt, so keeping a strong cash position is vital in my opinion. Moving forward, I will be watching carefully the inventory the company holds as well. If they aren't able to convert that into revenues, then I am going to start worrying. But with a ROA of 9.09%, I think they have done a good job so far to be fair.
Company Assets (Earnings Report)
The company's total liabilities decreased from $103.5 million to $79.1 million, indicating a stronger financial position. I think it is reassuring at least to see the company have a low amount of total liabilities and a cash position that at least can make a pretty significant dent in it.
Company Liabilities (Earnings Report)
All in all, I think the financial state of the company is sound. There are some improvements I'd like to see to be even more confident in their future prospects, but for now, I am happy to see them at least having no issues with debt.
Valuation & Wrap Up
Intrepid Potash Inc has an extremely low valuation using the last 12 months with a P/E of just around 4.5. But looking ahead, a different story unfolds. The forward P/E is around 18 which means earnings are expected to take quite a hit in the future. I think that a P/E of 18 is still not unreasonable to pay for a company that has a strong financial position and good assets which it can hopefully leverage efficiently in the future.
Stock Price (Seeking Alpha)
But looking at some of the peers in the industry, there seem to be better options out there. A company like Nutrien Ltd. ( NTR ) I think has better growth prospects and a much more favorable valuation of 8x forward earnings. Apart from just a P/E metric, the company also has much higher FCF margins of 12.5% and a strong ROA of 14%. Besides that, NTR also has a nice dividend yield of around 2.9% right now. The thing that IPI might have going for it is the low p/b of just 0.48 on a forward basis. If IPI then also manages to increase its cash position for example, which I think is a good route to go down, then you aren't really paying a premium for the company at all looking purely at the book value. But, on the side of NTR, their forward p/b is actually decreasing compared to IPI, which I honestly might be favoring more in this case.
To conclude the article, I think there is growth ahead for IPI, but there needs to be more consistency in order for me to confidently rate them a buy. I still see potential in the company and will keep a hold rating for it.
For further details see:
Intrepid Potash, Inc. Is A Hold For Now