Ultimately, this investment is too challenging to build a bullish thesis upon, even at this valuation. Sidestep this investment for now. Here's why:
Background To Intrepid
For those that followed my journey in Intrepid Potash over time will know that I was invested in Intrepid for years, but I'm not longer invested.
Today, I attempt to lay out a bias-free analysis of what potential shareholders have to make a rewarding investment at this current valuation.
Intrepid is predominantly a potash company. It very successfully diversified its operations to grow its Oilfield Solutions - investors will know this segment as its 'water' business.
Previously, I had been very much attracted to Intrepid's water business. In the past, management had declared that this business unit was expected to be a very high margin business, pointing towards the high 80% to 90% range. However, we are several years into this endeavor and presented below are Intrepid's latest results:
Source: Press statement
Readers will note that its Oilfield Solutions' gross margins are approximately 53% - a far cry from mid 80% we were being guided towards.
Keen followers of Intrepid know that its Oilfield Solutions encompasses several other revenue streams too, but this as close an approximation as management offers investors, and indeed, for our purposes more than sufficient to grasp that Intrepid's water sales are in no way close to 80% margins management had guided us towards.
Having said that, there are some amounts of Intrepid's high-margin water sales that are included either in its potash or Trio® segment, but you get a general idea that this isn't all that promising.
During its Q4 2019 earnings call, Intrepid notes that 2020 should see $32 million to $45 million in water sales. Now, remember, this includes the $53 million acquisition of Dinwiddie Jal Ranch on May 1, 2019.
Consequently, Q1 2020 should see strong performance in water sales as it compares with Q1 2019 (before the acquisition), but for the latter parts of 2020, as Intrepid starts lapping that acquisition I would assume organic growth will taper off rather quickly.
What About Its Strong Cash Flows?
This was somewhat disappointing, as Q4 2019's cash flows were largely flat with the prior year, despite having made a significant acquisition.
What about for the year ahead? Will its cash flows rapidly increase? Presently this is unlikely. Having said that, Intrepid's potash segment should normalize after the challenging 2019 it had to endure, and we may even see Intrepid's cash flows from operations reach approximately $60 million.
On the capex side, including growth capex, Intrepid guides to the midpoint of $30 million. This immediately begs the question, just how much free cash flow will Intrepid make for 2020? If Intrepid has a very strong year, its free cash flow may reach high $30 million to low $40 million.
Valuation - Possibly Fairly Valued, May Some Upside:
What sort of multiple should investors pay for Intrepid Potash?
Given its water diversification, but also embracing the fact that the bulk of its operations are highly cyclical and weather dependent, what is reasonable?
Realistically, investors should not hope to see Intrepid being priced at 10x to free cash flow, but I would be willing to believe that 8x to free cash flow is reasonable, possibly pointing towards high 30% upside.
The Bottom Line
There is a small potential that Intrepid Potash could grow from its current valuation into a rewarding investment.
For that to happen, investors are no longer going to buy a 'hope' story. They demand a 'show me' story. Unless Intrepid can show promising revenue growth followed by sustainably growing cash flows, investors are not likely to be attracted to Intrepid.
Furthermore, I do not believe that Mosaic (MOS) or another peer will acquire Intrepid as this management team has too much skin in the game and too little desire to sell their operations.
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