Starting a Position in Intrepid Potash

by: Trader Mark June 03, 2008 | about stocks: IPI    
Trader Mark

Trader Mark

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Based on Monday morning's earnings report and some follow-up information from my analyst team (ahem - readers), we've come to the conclusion that Intrepid Potash (IPI) prices their fertilizer 70% by contract, 30% spot in each quarter. For the contracted portion, if last quarter is a representative sample, they priced the contracted portion with a 4 month lag. Assuming April 1 'contract' pricing came in December 2007-January 2008, we should begin to see meaningful upside in Q2. Q3 (starting July 1) should price in March 2008 and the full effects of the rampant bull in potash pricing be reflected by then. A risk of course is if potash pricing falls in the back half of the year, something I would find as a very small probability:

[Mar 27: Canpotex Potash Contracts Secured with India @ $625][Apr 2: Potash Makers Already Talking $750, up from $625][Apr 16: Chinese Agree to $576 Price Point for Potash][Apr 23: Potash Hits $1000 on Spot Market]

With that said, I still want to hear myself tonight, but going with my analyst team, I'm creating a starter stake in Intrepid Potash here in the $48s, with a 400 share buy or $19,600. Due to market conditions and potential for commodity pullback, plus the need to listen to the conference call, I'm starting small - this is a 1.6% stake. I would like to add to this position in the low to mid $40s on a sector pullback, or if the name starts to run on me, I'll add as well.

I don't expect this to take off tomorrow, but if this pricing mechanism outlined above is accurate, the current 2008 estimate of $2.24 EPS should be surpassed by Dec 31, 08; but this will be a very backloaded year.With that said, coal is a 2009/2010 story and that has not stopped the stocks from creating massive moves in 6 weeks. So we won't know when the market will recognize inefficiencies - you just have to identify them and be ready to latch on once the whale starts swimming.

This new information makes me far more bullish on this name than I was 24 hours ago; again every $100 increase in potash = 70 cents EPS to Intrepid according to their filing.

We estimate that every $10 per ton increase in the price of potash will have a pro forma annual earnings impact of approximately $0.07 per share.

According to their filing this is their current pricing scheme

Q1 Average: $390 (Jan $357, Feb $397, Mar $417)


Q2 Looks like this - Apr $503, May $532, Jun $582

As an added bonus, it appears the vast majority of their sales are domestic in nature; with China short-changed in their potash this year, I can see certain Asian friends knocking on their door in the coming year. Again... just about everything is about China nowadays - but while they can slowdown their orders of steel, concrete, metals - keeping their people warm (coal) or feeding them (fertilizer) is going to be a very difficult thing to stop doing; so even if China does implode under its own supersonic growth rate, feeding and energy needs should not suffer. (Note that does not mean American stockholders of companies in these areas won't panic-sell on first hint of China slowdown, but that's just American stockholders being American stockholders - very little to do with fundamentals)
Disclosure: Long Intrepid Potash in fund and personal account

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This article has 12 comments:

  •  
    Jun 04 03:29 AM
    Q1 report was better than I expected. I do agree every report for a while will show huge profits.
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  •  
    Jun 04 03:47 AM
    Your analysis was excellant. Plus not to mention they are hiring more people. In an article I had read they were looking to employ 100 new people at there carlsbad mine. This stock looks like a winner for the next 5 years. If you noticed there P/E really isn't correct as posted on yahoo IPI front page. You can really only count the 0.27 cents from there first earnings. if the 2.24 you mentioned were to be an accurate discription. Divide the price today of 48.65 by 2.24 and you get a P/E of 21.72. Because they just listed and are a new company by there website. Take a selling price of IPI at 90.00 and divide it buy 2.24 you get a p/e of 40.12 that is a little less than POT and a little less than MOS if I remember correct. But with the summer comming and solar evaporation at it's highest and your spot of 1000. pnt. you can see min this company will be is 90 dollars by mid summer or after 2nd quarter earning report. Now with your figure of 70 cents per 100 and the first quarter earnings. 357 + 397 + 417 = 1171 divided by 3 months = 390 average. Now the next 3 months 503 + 532 + 582 = 1617 divided by the 3 months = 539 average. Now substract $390. - $539. = $149 increase quarter over quarter your .70 cents per 100 = .70 cents now 49 = .35 cents add .70 + .35 = 1.05. take 1.05 + .27 =1.32 for 6 months now without any price increase rest of year it looks conservatively 1.32 + 1.32 = 2.64 divided it into the price of IPI today 48.65 divided by 2.64 = a P/E of 18. Take a selling price of $110.00 dollars divided by 2.64 = 37 p/e. My point IPI is undervalued by at least 150% by years end IPI should be min $150.00 a share and max of $185.00 a share
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  •  
    Jun 04 09:01 AM
    A close friend "IN THE POTASH BUSINESS" is buying and buying (as well as I) IPI. We both feel this stock has a potential upside to $130- $140. And that's with very conservative figures. I agree with FEAR (above)
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  •  
    Jun 05 11:15 PM
    What do you think about TNH?
    Reply | Link to Comment
  •  
    Jun 06 08:47 AM
    I like your reasoning fear,

    However POT are trading at similar PE ratio with IPI. POT trailing PE ratio is 40 while there forward PE ratio is around 20.

    POT current price of $210 with EPS for 2008 is $10.25 that comes out with a PE ratio of 20.4.

    IPI current price of $50 with EPS for 2008 of $2.24 the PE ratio is 22.

    So although POT current PE ratio is 40 from last years earnings there forward PE ratio is 22.

    SO i expect NEXT YEAR 2009 for IPI to have a TRAILING PE ratio of 40 and forward PE ratio of around 20. So that being said with current estimated EPS of 2.24x40= 89 for next year. But remember for IPI to have a price of 89 then POT has to have a price of 400. I think if the price of potash keeps increasing goes up to above $1500 for the next 2 years than we can see this type of growth. If price of potash levels offs than forward and trailing PE ratio will equal each other.

    Look for the price of potash to be at 55 by end of this month and price of 60-65 in several months and by 70 by end of year. that my prediction.
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  •  
    Jun 06 09:05 AM
    I just look at the estimated earnings for 2009 which is $3.85. times 20 = $77.


    Trader Mark,

    I too did not get into the IPO price but from your article you mentioned the price would open up at 60, which is why i was excited about this stock. I bought several thousand shares (3500 to be exact) at a price range of $45-51 on the first and second day it came out probably and average of $48. Either way i learned about this company and this IPO from you. I wanted to ThANK YOU. I enjoy your articles and hope to see you posting on SA more now that you hold a position in IPI. One advise, i dont think that the price of IPI will go down less than $48 now. I think we will consistently see a price of $50+. But i can be wrong. Good luck to you.
    Reply | Link to Comment
  •  
    Jun 06 11:28 PM
    Cramer just recommended IPI, should I get out?
    Reply | Link to Comment
  •  
    Jun 07 02:22 AM
    Well I believe we all owe you a great big hug for your excellant article and your perfect call. DOW down 400 pts and IPI up over 2 dollars what a call and you hit the mark. IPI in my opinion will hit 75 after next earnings call. IPI sold more potash than they had been expected to for the entire year. We who all understand the magnitude of that feat for we are true investors with our own hard earned money. Take the train it is just flueling up with potash and American Farmers come to us for IPI sells only to america and doesn't have shipping costs like Canada.
    Reply | Link to Comment
  •  
    Jun 07 02:37 AM
    Pooramerican: If I may so bold to post to your question of TNH. Today we saw the DOW down 400 points and TNH has a $16.00 or 11% Dividend it pays. Like POT and MOS they use natural gas to make some of there fertilisers now TNH products are different than IPI. But natural gas will rise and so will there product TNH has a great product and just like Potash which is skyrocketing Natural gas isn't expected to jump that much. Now natural gas has risen but not to the extent that it affects THN and THN is a great company. In my opinion if you want a dividend paying stock THN is the one. It is in the AG business and you can't go wrong with any in the ag sector as long as food and ethanol is going strong. TNH is a balance to a portfolio just like adding MON or dupont I hope this helps
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  •  
    Jun 07 03:05 AM
    Everyone bashes Jim Cramer but I think he is very smart. I have watched his show but now I watch Fox business channel. Jim Cramer has said he has made mistakes and anyone who can admit they make mistakes shows me he has compassion. Jim does care about the little investor also if you listen to Jim he will tell you his thought process on the stocks he picks and his approach is a great approach. He has to rate every sector and personally I couldn't make a case for some sectors and I can't fake it. Jim Cramer is a person I believe has forgotten more about stocks and mutual funds than I will ever know and I study stocks 7 days a week for over 25 years.
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  •  
    Jun 10 02:09 AM
    Adesia you are a woman correct I mean with a hug I don't hug guys.
    Reply | Link to Comment
  •  
    Jun 14 09:23 AM
    Fear,

    I did not get the last post....."woman&q... anyways i will take it as a compliment. Congrats on the profits.....
    Reply | Link to Comment
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