2023-11-08 08:26:35 ET
Summary
- Intrepid Potash's stock price has dropped significantly due to bearish potash commodity pricing and weak forecasts for 2024.
- The company has a strong balance sheet with no debt, and a market capitalization that is significantly below tangible book value.
- Shares are substantially undervalued and unloved today, holding the potential to double or triple in price over the next 2-3 years.
I have mentioned a number of companies with stock valuations selling well below tangible book value over the last month. This list includes City Office REIT ( CIO ) here , PBF Energy ( PBF ) here , Fresh Del Monte Produce ( FDP ) here , and Danaos ( DAC ) here for starters.
Another name I own with similar long-term undervaluation is Intrepid Potash ( IPI ). The company mines and sells potash, salts, and brine from mines in New Mexico and Utah.
2022 EPS peaked around $6 for cycle profitability on the Russian invasion of Ukraine disrupting potash supplies from eastern Europe. Today, analysts are on the opposite side of the spectrum, with ultra-low expectations of only slight income generation during 2024. An oversupplied potash market worldwide, with lower-than-expected farmer usage in America during 2023 are the excuses for a weaker immediate outlook for Intrepid.
As a consequence of bearish potash pricing and forecasts for 2024, the stock price has tanked from a high of $122 during April 2022 to less than $21 currently (bottoming at $17 in June).
The good news is the company has a stellar balance sheet, holding NO debt vs. $153 million in liquid cash, inventories and receivables. Even better news is you can buy out the whole company for a theoretical market capitalization of $264 million and cash-adjusted enterprise value of just $250 million at $21 per share. Plus, if you adjust for its liquid current asset position minus all liabilities ($70 million in total IOUs), share pricing equates to purchasing its mines (with 20-year lives for economic resources) and all future profits generated by the business for a net $180 million! This compares to $72 million in after-tax operating income outlined during 2022.
My view is the valuation is absolutely too low, arguing for long-term share ownership. I will gladly buy and hold a position waiting for better days to return.
The Business
IPI offers muriate of potash to a variety of industries, such as the agricultural market as a fertilizer input and the animal feed market as a nutrient supplement. It also provides Trio , a specialty fertilizer that delivers potassium, sulfate, and magnesium in a single particle. Other businesses include water sales for the oil and gas services industry, plus salt for animal feed, industrial applications, pool salt, and the treatment of roads and walkways for ice melting or to manage road conditions. In addition, Intrepid sells magnesium chloride for use as a road treatment agent for deicing and dedusting, brines for use in the oil and gas industry to support well workover and completion activities, plus metal recovery salts.
The September Investor Presentation does a nice job of summarizing the potash market and assets owned by Intrepid. Quality U.S. assets, a superb balance sheet well prepared for a slow industry rebound, and a management/insider team controlling 17% of the company are noteworthy in my view.
Bullish Valuation Story
The main equity investment attraction for me is the very large share price discount to tangible book value calculations. Another idea - when we subtract out current assets and liabilities, investors are getting hundreds of millions in mine value (using cost-and-depreciation accounting) effectively for pennies on the dollar. If your investing goal is to find a hidden gem with hard assets at a bargain price, Intrepid Potash should be right up your alley.
The simplest way to explain my optimism is expressed on the charts below. For example, when we look at the total equity market valuation of the company ($21 a share multiplied by 13 million shares outstanding) and compare this number to its tangible book value (hard assets like cash and inventories, plant & equipment, land, buildings, etc. - subtracted by all liabilities), we are again trading at the same level as past stock-cycle bottoms in 2016 and 2020. For those with some patience, assuming history repeats, a double or triple in price is possible over the next 2-3 years.
Further bullish news is the balance sheet is sitting in a much stronger position than 2016 or 2020. So, we now have a huge disconnect between the "enterprise value" takeover number and the tangible book value for each ownership unit. What this means is today's discount may have an even smarter risk/reward setup than the previous two instances.
Enterprise valuations on EBITDA and revenue equally telegraph an interesting and cheap entry point for IPI. Using past peaks in both, projecting a price jump of 4x or 5x the current stock quote is a real possibility.
Lastly, Seeking Alpha's computer ranking of Intrepid puts an overall Valuation Grade of "A" on shares, vs. its previous 5-year history and peer data points. My conclusion: if you want long-term value on your investment purchase, IPI is a top choice today on Wall Street.
Technical Chart Read
Another reason for writing this article is Intrepid has a history of bottoming in October-November, after the last two multi-year cycle declines ended. I have drawn the current 2023 setup vs. the 2016 and 2020 bottoms in share pricing below. Are we reaching for another seasonal cycle bottom right now? We'll know if price turns higher abruptly, crossing above its 200-day moving average soon (around $25 in early November).
2023
2016
2020
Final Thoughts
Q3 earnings will be out shortly, with Wall Street estimates of a slight income loss at -$0.10 EPS, on the lowest volume $40 million in a quarter since Q4 2020. The good news is analysts are expecting the July-September period to mark the low point for this year and perhaps the latest down-cycle (this span is seasonally the weakest for Intrepid from North American ag fertilizer demand). Management is working hard to expand potash production and reduce costs , after missing 2023 goals. So, we could be approaching a buy-the-bad-news event over the next week, as forward-thinking investors and short sellers reposition for 2024's crop growing season.
The truly bullish upside event for Intrepid shareholders would be escalating conflict in eastern Europe could throw a monkey wrench into global potash supplies, creating shortages that remain for years. Otherwise, cutbacks in expensive supply elsewhere (which is taking place) and a gradual increase in demand from farmers around the world (searching for better crop yields) should support potash pricing a year or two down the road. Under either scenario, a recovery in the potash market is not currently factored into Intrepid's stock valuation or quote.
What are the downside investment risks? A deep recession and/or a stock market crash wouldn't help the bullish argument, for sure. Such a blow to economic output and wealth would likely pull demand lower for potash, all other variables remaining the same.
The most likely bearish scenario is a weaker U.S. economy, low grain prices, and potash oversupply issues next year could keep a lid on Intrepid. However, I don't see much downside in price as sustainable long term, because of still profitable operations, its existing and incredible discount to net tangible assets, plus decent odds that supply/demand forces in the potash market will rebalance over time.
I have a middle of the road, upside projection for shares of $30-$35 in 12-18 months, which would still be a distance underneath tangible book value (currently $56 per share, $42 after subtracting deferred tax assets), delivering gains of +50% to +70% on new share purchases today.
For a worst-case scenario including a bear market on Wall Street and recession next year, I believe $15 is about as bad as it should get for the risk side of the investment equation. Such a price for Intrepid would essentially reach a modern record low valuation on sales and book value.
The ultra-positive upside argument is a return to $100+ a share is possible over 2-3 years, where it traded during 2015 and 2022. In summary, this risk/reward analysis places potential downside at -25% vs. upside of +400% in future years. I rate Intrepid Potash shares a Buy and own a growing position size.
Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.
For further details see:
The Bottom Fishing Club: Intrepid Potash