jebmo’s posthaven

Investment Thesis

I have been bullish on Intrepid Potash (NYSE:IPI) for a while now, and although the stock is up 100% since I wrote about it 3 and half months ago, I still think there is at least 35% upside potential. Although when I first wrote about Intrepid I concluded that at that price of roughly $1.10 it was a "no-brainer investment", at what it currently trades, roughly $2.35, the same can not be said. However, I still think it has significant upside for investors before the earnings come out in a few weeks.

IPI data by YCharts

Overview

Intrepid Potash is the only U.S. producer of muriate of potash and supplied approximately 9% of the country's annual consumption in 2015. Intrepid Potash also competes with Mosaic (NYSE:MOS) to sell a premium type of fertilizer. Whereas Intrepid Potash sells Trio (sulfate of potash magnesia), Mosaic bundles several different crop nutrients in each granule of Microessentials. However, the concept is the same, trying to sell a fertilizer product that has better margins.

Financials

Please have a quick look at the table below.

Source: morningstar.com; author's calculations

I will be the first to point out that over the past 5 years, Intrepid has had negative 10% returns on equity and has been burning up lots of cash. But this needs to be taken in context. Over the past 5 years, the price of potash has been falling at quite a clip (see below).

Potassium Chloride (Muriate of Potash) Spot Price data by YCharts

However, only a few weeks ago both Mosaic and Potash Corp. (NYSE:POT) released quarterly earnings and both competitors had similar messages.

We are optimistic about 2017. And we are definitely feeling better now than we were at this point last year. There is no question that business conditions are improving

- Mosaic 2016 Q4

...we continue to expect strong global demand in 2017. And, importantly, we have seen meaningful reductions in global capacity and production in both potash and phosphates

- Mosaic 2016 Q4

we believe this is the first year in more than a decade where potash industry has had a drawdown in global inventory at both the producer and distributor levels.

- Potash Corp. 2016 Q4

Insider Ownership

In my previous article, I already touched on the fact that CEO Robert Jornayvaz had been purchasing large quantities of Intrepid Potash stock in the open market. He spent roughly $2.3M in the stock from $7.29 all the way down to $0.84 and back to $1.29. Robert Jornayvaz is still very much underwater in these series of investments, having bought the majority of the stock at prices above $3 and the current stock trades for less $2.50. However, I believe that there is no one that would know the fate of Intrepid Potash better than him. Also, I should mention that:

Mr. Jornayvaz's performance stock units (which represented all of his targeted total direct compensation for 2015 other than a $100,000 salary) was reduced to zero based on our performance

Source: proxy statement 2016

Mr. Jornayvaz's 2014 salary was reduced by 50% as compared to 2013 (from $100,000 to $50,000)

Source: proxy statement 2015

So here is the CEO of the company who has not been adequately compensated for several years and somehow managed to sum up the courage to buy up $2.3M of stock in his own company in the open market. I'm willing to bet that this is a very calculated move on Mr. Jornayvaz's behalf. Especially when one considers that Mr. Jornayvaz took the company to IPO at the height of the previous potash cycle and will have cashed in at a very healthy price.

Relative Valuation

Below I compare Intrepid Potash with its closest competitors.

Source: my calculations

The table above illustrates two facts. The first is that these 3 competitors are trading at a discount to their respective 5-year averages, which is indicative of the whole industry being out of favor. The second fact is that Intrepid Potash is disproportionately cheaper than what it has been and to its competitors.

Conclusion

Needless to say, potash is highly cyclical and there are significant dangers in investing in a pure-play commodity company. There are a lot of factors that are outside of management's control, least of all potash pricing and farmer's demand for potash versus competitors' oversupply that has taken place in the past, from 2012-2015.

However, I believe that has already been more than accounted for at the current share price, and I can see this mispricing closing and a 35% upside potential to the current share price.

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Disclosure: I am/we are long IPI.

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.