Intrepid Potash (NYSE:IPI) is the largest producer of potassium chloride (muriate of potash) in the United States. In the last six months, the stock’s price increased from $44 to $120 and retreated to below $65. In 1Q 2022, the price of potash was the main driver of IPI’s significant sales. The prices of fertilizers have soared since the beginning of the war in Ukraine, followed by Belarus’ potash sanctions, and the Russian & Chinese fertilizer export ban. In April and May 2022, the average weekly prices of potash were higher than in 1Q 2022. Thus, I expect IPI’s sales will increase in the second quarter of 2022. Comparing Intrepid Potash with other peer competitors, I estimate that the stock is undervalued and has more than 56% upside potential to reach $100. IPI is a buy.
In its 1Q 2022 financial results, IPI reported total sales of $104 million, compared with 1Q 2021 total sales of $71 million, up 46% YoY. The company’s gross margin increased by 418% to $47 million in 1Q 2022 from $9 million in 1Q 2021. IPI announced a 1Q 2022 net income of $31.42 million, or $2.31 per diluted share, compared with a 1Q 2021 net income of $2.45 million, or 18 cents per diluted share. IPI’s potash and Trio net realized sales prices increased from $282 and $233 in 1Q 2021 to $703 and $469 per ton, respectively. Intrepid reported 1Q 2022 cash flow from operations of $34.1 million, compared with $19.1 million in the same period last year. IPI started multiple production improvement projects to capitalize on a strong commodity environment and improve production cost per ton. The company's 1Q 2022 strong results were driven by higher prices of potash and Trio, offsetting lower potash sales volumes. “We believe the outlook for Intrepid for the remainder of 2022 and the next couple years is very positive as the supply-demand balance for potash should continue to support strong economics,” the CEO commented.
Potash and Trio are the main segments of Intrepid. The company’s potash sales increased from $43.58 million in 1Q 2021 to $56.44 million in 1Q 2022 (see Table 1). However, in 1Q 2022, IPI’s potash sales volume and production volume decreased by 41% (YoY) and 9% (YoY), respectively. Price was the element that caused IPI’s potash sales to increase by 30% YoY in the first quarter of 2022. IPI’s average potash net realized sales price per ton increased by 149% to $703 from $469. The company entered the year 2022 with fewer tons in inventory and less potash available in its ponds after the below-average 2021 production season. Thus, due to the lower potash inventory, and unfavorable weather in various parts of the U.S. in the first quarter (which delayed planting), IPI’s potash sales volume decreased in the first quarter of 2022. However, due to the higher prices, IPI’s 1Q 2022 sales increased by 30% YoY. What will happen in the next quarter? The weather condition is still unfavorable in the United States (For example see here, here, and here). On the other hand, prices of corn, soybean, and wheat are 50 to 90 percent higher than the 10-year average. Thus, growers have the incentive to increase production. More crop production means higher demand for fertilizers (see my recent article on Nutrien (NTR)).
I predict potash prices will remain high for the next quarters because of the war in Ukraine, sanctions against Belarus’ potash, Russian fertilizer export ban (as a result of its pressure on the west), and Chinese fertilizer export ban (as a result of food insecurity concerns). Figure 1 (up) shows that potassium chloride (muriate of potash) monthly price increased from $202 per ton in April 2021 to $562 per ton in April 2022, up 178%. Also, Figure 1 (down) shows that the average weekly prices of potash in April and May 2022 are higher than in 1Q 2022.
Moreover, IPI has increased its capacity to produce more potash. “We are beginning multiple improvement projects at our potash facilities, including a new injection pipeline at HB, another potash cavern in Moab, and upgraded wells at our Wendover facility, which we expect will add production volume as early as the spring of 2023 and continue to increase through the next few evaporation seasons as our overall brine quality improves,” the CEO commented in IPI’s 1Q 2022 financial report.
Table 1 – IPI’s segment sales
Figure 1 – Potash prices
Furthermore, IPI’s Trio sales increased from $23.69 million in 1Q 2021 to $4.58 million in 1Q 2022. In the first quarter of 2022, the company’s sales volume and production volume increased by 3% (YoY) and 16% (YoY), respectively. IPI’s average Trio net realized sales price per ton increased by 101% to $469 in 1Q 2022 from $233 in 1Q 2021. Unfavorable weather condition threatens crop production (demand for IPI’s Trio decreases) and higher prices will increase growers’ incentive to produce more (demand for IPI’s Trio increases). On the other hand, due to the war in Ukraine and food insecurity concerns, the price of IPI’s Trio will remain high. “We also continue to run additional underground shifts at our East mine to increase the availability of our Trio products,” the CEO said. Thus, I predict IPI’s sales will increase in 2Q 2022.
Analyzing the company’s operating conditions shows that IPI’s operating cash flow surged amazingly from $31 million at the end of 2020 to $79 million in 2021. Also, the company’s capital expenditure saw an increase from $16 million in 2020 to $20 million in 2021. When all was said and done, the company’s free cash flow ultimately sat at $59 million at the end of 2021, which is far higher than its level of $15 million at the end of 2020. Thus, Intrepid’s cash structure shows a healthy and well-performed operation position (see Figure 2).
Figure 2- IPI’s cash structure
The company’s capital structure shows that IPI’s net debt declined severely. Also, the company’s equity level surged amazingly to $663.4 million compared with its previous level of $411.3 million in 2020. IPI’s cash generation grew by over 87% to $36.5 million at the end of 2021. Moreover, the company’s debt sat at only $4 million, which shows a 93% decline from the previous level of $60 million at the end of 2020. IPI’s debt is well beneath its equity level and thus leads to better leverage conditions (see Figure 3).
Figure 3- IPI’s capital structure
I used Competitive Companies Analysis (CCA) to evaluate IPI stock. Comparing Intrepid Potash with other peer competitors and using the CCA method, I estimate that the stock is undervalued and has more than 56% upside potential to reach $100. This method reflects the real-market data and is an appropriate way of analyzing IPI due to the company's relative stability. Based on market cap and financial operations, I selected the peers and used common key ratios in a CCA method to illustrate the value of similar companies. Data is gathered from the most recent quarterly and TTM data (see Table 2).
Table 2- IPI financial data vs. its peers
Comparing IPI's ratios with other peer companies, I observe that despite the high EV/sales ratio and EV/EBIT ratio, the stock is undervalued. IPI's EV/sales ratio is 3.09x, 44% higher than the peers’ average of 2.14x. Also, the company's EV/EBIT ratio is 11.90x, 9% higher than the peers' average of 10.89x. On the other hand, Nutrien’s EV/EBITDA ratio equals 7.81x, which is 15% below the average of 9.14x. Most importantly, IPI’s P/E ratio is 3.07x, which is 70% below the peers’ average of 10.48x. We can see that the company’s EV/sales ratio and EV/EBIT ratio are not as good as the peers’. However, IPI’s P/E ratio indicates that the company is attractive as a potential investment (see Table 3).
Table 3- IPI stock valuation
At the end of 2021, IPI’s free cash flow sat at $59 million, which is far higher than its level of $15 million at the end of 2020. Intrepid’s cash structure shows a healthy and well-performed operation position. Moreover, the company’s debt sat at only $4 million, which shows a 93% decline from the previous level of $60 million at the end of 2020. IPI’s debt is well beneath its equity level and thus leads to better leverage conditions at the end of 2022. What are the drivers? The war in Ukraine and the increasing food insecurity in the world. The prices of fertilizers have soared and will remain high for the next few quarters. My stock valuation shows that IPI is worth $100 per share. It is the right time to buy Intrepid Potash stock.
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Disclosure: I/we have a beneficial long position in the shares of IPI either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.