Profit from World’s Largest Potash Fertilizer Company
In April of 2008, markets were still incredibly liquid and new companies were being brought to market on a weekly basis. Intrepid Potash (IPI:NYSE) was one of those new exciting companies with exposure to the agriculture market and a very attractive business model.
Those days, investors wanted a piece of agriculture because of the excitement over biofuel. As farmers planted crop after crop of corn, which was intended to be used for ethanol, demand for fertilizer skyrocketed. This was great news for our new IPO, which is one of the few companies with strong potash reserves and a strong balance sheet.
Investors loved the story and the potential for huge profit as a shortage of fertilizer became a major concern across the grain belt — and stoked speculation on the floors of Chicago and New York trading floors. However, when ethanol came under scrutiny (because many times the production of ethanol takes so much energy — which is contrary to the whole point of using ethanol), and when prices of natural gas and oil came crashing back to Earth, speculators in fertilizer stocks quickly saw profits turn to steep losses.
Intrepid Potash got caught up in some of this trading fiasco as the stock doubled from its IPO price in just 10 weeks of trading. But five months later, the stock had fallen prey to market pressures and ended up trading at just half of its initial offering price. The demise was certainly a black eye to Goldman Sachs, who underwrote the deal and had many of its clients involved in the stock.
But now in 2009, the picture is completely changing for Intrepid Potash. Earnings have continued to rise due to healthy demand for potash fertilizer and the company’s strong financial position. The company actually has more than $100 million in cash and no long-term debt.
This is a huge accomplishment for the mining industry, which usually requires significant capital in order to buy land, build the mining infrastructure, and begin production before ever selling its first carload of product.
Intrepid Potash is the largest producer of potash fertilizer in the U.S., with five mines in Utah and New Mexico. The company is one of only two firms to export potash fertilizer to international markets, and has the capacity to produce 1.2 million tons of potash fertilizer each year. While rival Potash Corp. of Saskatchewan (POT:NYSE) has a market cap more than 13 times that of Intrepid Potash, the earnings growth and strong financials make Intrepid Potash a much more exciting investment.
Collect 91% Returns
I can go on all day about the strength of this company, but as an investor, there is really only one thing you’re probably interested in: OK Zach — How much money am I going to make and when will I be able to cash in? Well, Intrepid Potash is an especially exciting position, not just because of my expectation for high demand in agricultural production, but also because of its expected growth even with no expectations for inflation.
Analysts are currently pegging next year’s earnings at $2.82. These estimates are coming from the typical Wall Street firms who are expecting inflation to be relatively tame over the next 12 months.
By now, you know my expectation is for inflation to pick up rapidly, and higher prices will certainly pad the earnings for Intrepid Potash. But let’s assume for now that these expectations are correct.
Now, earnings of $2.82 represent growth of more than 50% compared to the expectations for this year. You would think with that kind of growth rate, the stock would be sporting a very high multiple. Investors typically pay for growth in the form of a higher stock price — and when a company is growing by 50% annually, it’s not uncommon for investors to pay $25, $30, or even $50 for every dollar that the company earns.
As I write, Intrepid Potash is trading at about $26.50 — or less than 10 times earnings for 2010. The reason investors aren’t paying a premium price for growth is they believe 2010 earnings are a flash in the pan — an anomaly — and certainly not indicative of the long-term growth rate for this company.
I won’t try to explain to you that Intrepid Potash can add 50% to earnings each and every year. But I do think that with the growing need for agricultural products, the threat of inflation, and with Intrepid Potash ability to export product to growing nations such as China and India, one could easily justify a 20% to 25% growth rate over the next 10 years.
I like to be overly conservative when estimating long-term prices of stocks. That way, hopefully, any surprises end up making us more money instead of letting us down. So you can probably understand my excitement when I ran the numbers on Intrepid Potash and came up with a 91% target for next year. Here’s how I got that number:
- Analysts expectations are for earnings of $2.82 — that’s conservative but we’ll stick with it for argument’s sake.
- I used a cautious multiple of 18, which is probably too low for a company growing by 50% next year.
- Putting those two figures together comes up with a stock price of $50.75 — this should occur sometime in mid-year 2010 when investors realize this estimate will likely be hit.
- Starting with the current price of $26.50, that’s a 91% return from a very stable and strong company. Not a bad opportunity in this market.
It is clear that in a normally functioning market, this stock could grow some excellent profits. But I want to take my conservative hat off for a minute and discuss some “out of the box” scenarios:
So, what if Japan is really bluffing? What if its “unshakable trust” is just a way to hold up the dollar until it can quietly begin diverting funds elsewhere? What if China is successful in swaying international opinion and the seeds are planted for a new world reserve currency? What if the only way to store real value is to own “stuff” or the companies that actually make that stuff?
Well, my friend, if this is the future we are looking at, companies like Intrepid Potash could be the retirement package savior as the value of profits, the value of their reserves underground, and the value of their stability will be worth far more than any debased paper currency.
Looking for Another Investment Opportunity?
Randy Wikowski’s had spent years saving every nickel and dime he could earn from his manufacturing job just outside of Boston. So, when he heard about “energy incentives,” he was skeptical. But when he saw the potential payouts… and how little money he could get in with, Randy gave it a shot. Just over a month later, he had an incredible opportunity… the chance to cash a check for $204,400. You too can collect lump sum payouts... read our Special Report for more details.
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