Diamond In A Garbage Can?
While Potash is a prime example of a large market leader trading at a deep discount in a tough environment, Intrepid Potash, Inc. (NYSE:IPI) is a smaller player hurt by macro factors and limited options. But that’s not always a bad thing for smart investors.
It’s obvious that Intrepid caught just the tail end of the commodities supercycle.
Formed in 2000, the company was put together as roll-up to consolidate smaller potash producers in the U.S. Over the past eight years, its output has supplied 1.6% of annual global potassium consumption — not too impressive compared with Potash Saskatchewan ‘s 9.3% global share. However, Intrepid Potash, Inc. (NYSE:IPI) supplies 9.3% of annual U.S. consumption — not bad for a 13-year-old company with just under $1 billion in market capitalization.
Whereas Potash Corp./Saskatchewan (USA) (NYSE:POT) is a whale with a diversified business, Intrepid Potash, Inc. (NYSE:IPI) is a smaller catch that offers value and opportunity. While a young company, Intrepid has no long-term debt. Shares trade at around $12.30, and there’s no dividend. Not too exciting. But the stock also trades right at its tangible book value (the value of all of the company’s physical assets). In 2012, earnings per share were $1.16 while projections for this year call for 56 cents a share. That’s a significant slowdown but still earnings-positive.
Intrepid Potash, Inc. (NYSE:IPI) looks like a classic takeover candidate, with halfway decent financials and worthwhile market share in its particular sector. Disruption in a sector usually results in at least some consolidation. Being a smaller player, Intrepid Potash, Inc. (NYSE:IPI) would be a target. A bigger operator could gain significant U.S. market share for just a modest premium, 20% to 30%. But what seems like a modest premium could be highly lucrative to investors at the stock’s current level.
Risks to consider: As discussed earlier, the resulting bear market in stocks after a sector bubble bursts could last awhile and usually, they last longer than an average investor thinks it will. Stock selection and mental preparedness is essential. Potash Saskatchewan is the The Coca-Cola Company (NYSE:KO) of the fertilizer business. Its substantial dividend yield, strong market position and reasonable valuation provide the necessary ballast. Intrepid Potash’s upside as a consolidation candidate offsets the risk somewhat, but you shouldn’t own a stock based on takeover speculation without an exit strategy should the acquisition fail to materialize.
Action to Take –> The potash industry may be in disarray due to pricing pressure, so this might be the best time to buy the stocks of those companies. Potash Saskatchewan ‘s position as the market leader and strong operating history make it a natural choice. With market stabilization and consistent execution, shares of Potash Saskatchewan should have a 12-month price target of $38. That would mean that the P/E would only have to rise to 15 or so. Factoring in the 4.75% dividend yield, the result would be a total return of 36%. As an ideal acquisition target, shares of Intrepid Potash, Inc. (NYSE:IPI) offer value at their tangible book value: considering a 25% premium, a reasonable takeout price of $15.
P.S. — Stocks like Potash Saskatchewan are similar to a special group of securities we call “Forever Stocks.” These are stocks solid enough stocks to buy, forget about and hold — “Forever.” To learn more about these stocks — including some of their names and ticker symbols — click here.
– Adam Fischbaum
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