GALP This Stock Up
Kirk is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
While potash might sound like something you'll find in a bowl on your table this holiday season, it is only there indirectly. Potash is actually an ingredient that helps grow much of what is in your refrigerator and on your table each night. Increasingly scarce potash provides one of three essential ingredients for plant growth via water soluble potassium, as well as, profits to a select field of companies.
A number of potash producers make it into the investment news from time to time, usually large Canadian companies such as Potash Corporation of Saskatchewan (NYSE: POT) and Mosaic (NYSE: MOS). Both of those company's shares are often priced for perfection. A smaller somewhat overlooked American company, however, seems positioned and priced for gains as I type. Interpid Potash, Inc. (NYSE: IPI) is a midsize producer of potash, but the largest in the United States. They provide about 8.5% of all potash used in America.
As an American company, with plants located in New Mexico and Utah, competing primarily with those larger Canadian rivals, Intrepid has a transportation and cost advantage that it exploits. Intrepid's proximity to its farmer clients allow it to produce at high levels of efficiency and maintain a competitive advantage as evidenced by a 13% return on equity and double digit growth rates. Intrepid also produces Langbeinite, another source of potassium which it believes can take on a larger role for American farmers over time.
Intrepid's Utah mines further benefit from low cost solar evaporation techniques of production adding to its competitive advantage. In addition, the use of natural solar evaporation, while seemingly mundane, is a consideration for the growing local, green and organic trend among American small farmers. In considering non-compost forms of fertilizer, the growing ranks of small farmers, many of whom are forming groups for the purpose of making input purchases affordable, are looking at considerations such as how and where potash is produced.
As the United States continues to ramp up agriculture production in order to export food to a hungry world, potash prices have a lot of support in the $300 to $400 per ton range. There is a likelihood that prices drift upward along with other natural resources over time adding to Intrepid's profits as extraction costs appear to be relatively flat. In years that potash prices spike, Intrepid profits soar.
While others have covered Intrepid more in depth than here, and I encourage you to read their analysis, I am most interested in mentioning companies that I agree are strong when their shares trade on the cheap. GALP, for those who have not read other of my pieces, is Growth at Low Prices, GARP's more conservative cousin.
At today's low $20s prices, Intrepid meets the test of a GALP stock. Analyst estimates of fair value range from upper $20s to low $30s in the short to intermediate term. My fair value is a bit higher based upon the belief that food production and exports will be central to America's economic resurgence over time.
I hope the ideas here give you a framework for further analysis of Intrepid and deeper appreciation for your next holiday dinner. Peace and profits be with you.
Kirk Spano is the founder and owner of Bluemound Asset Management, LLC a Wisconsin Registered Investment Advisor. Neither Kirk, nor Bluemound clients currently hold a position in any stocks mentioned in this article and do not plan any transactions in the next 3 trading days. Opinions subject to change at any time without notice.