By G C Mays
Intrepid Potash (IPI) reported solid revenues and earnings in the company's first quarter, despite weakness in the potash market. The company earned $20.6 million or $0.27 per share on revenues of $112.2 million, which is in line with my earnings preview estimate of $109.8-$118.4 million. Earnings came in on the light side of the $0.30 per share consensus estimate. In the first quarter of fiscal 2011, the company earned $28.2 million or $0.38 per share on $104.9 million in revenues. However, that net income figure includes a $12.5 million insurance settlement related to a wind incident that occurred in 2006, which resulted in an insurance claim. The amount of the claim is equal to earnings of $0.10 a share net of taxes.
Source: The Mays Report.
Despite higher average net realized selling prices, gross margins of 36.7% were below fourth-quarter margins of 40.8% and 39.2% in the same quarter a year ago. One of the reasons for the lower margins is the ongoing expansion at the Carlsbad (East) New Mexico plant. The Carlsbad site has been under construction for the last two to three years and, according to the company, in addition to the expansion it has changed other aspects of the plant as it moves through the various phases of construction project. This has extended the time needed to complete the project and to return to production levels that will improve gross margins.
Source: The Mays Report
The company says there will be a high level of variability in operating rates for the next several quarters. Slightly lower gross margins will be the likely result. The Carlsbad project is also impacting revenues, as the company stated that it was unable to meet the demand of its industrial and feed market customers in the first quarter.
The average realized price received for the company's Muriate of Potash, or MOP, is competitive with Mosaic (MOS) and was higher than Potash Corp.'s (POT) average realized price received in North America during the first quarter.
Source: The Mays Report
At a recent price of $22.97, the company is trading at 3.8 time sales, which is higher than the peer group average of 2.3 but only 1.9 times book value, which is less than the peer group average of 3.2. As I have written about before, the price-to-sales multiple has the least amount of variability of all the price multiples when applied to the agricultural chemicals peer group. Where potash makes up a significant part of company revenues, the stocks of those companies have underperformed. The leaders year to date have been CF Industries (CF) and Agrium (AGU).
I expect the stock of Intrepid Potash to continue to slightly underperform primary potash producers Potash Corp. and Mosaic until I begin to see a significant transfer of inventory from producer to dealer bins, which is not very far off in my opinion.