1 Hugely Ignored High-Potential Stock

Neha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

This stock has been around for just five years, but that’s not the reason why it doesn’t get the attention it deserves. It is the least diversified among all. Yet, Intrepid Potash’s (NYSE: IPI) performance in its last quarter was a standout -- while peers skid on Street expectations, Intrepid beat on both top and bottom lines.

By pulling off a great quarter, Intrepid busted some myths investors (including me) usually live with. Pay attention, fertilizer investors!

A company that doesn’t have global presence always loses.

Not necessary -- Intrepid proved it.

Intrepid’s numbers were easily the best among peers. While PotashCorp’s (NYSE: POT) third-quarter potash sales were down 9% from the year-ago period and Mosaic (NYSE: MOS) reported a 10% rise in potash sales in its last quarter, Intrepid’s potash sales surged 18%. While PotashCorp’s sales volumes fell 5% and Mosaic sold 6% more potash, Intrepid’s volumes climbed 31% more potash in this past quarter. Agrium’s (NYSE: AGU) was the worst with potash sales volumes tanking 54% (due to plant turnaround and low demand).

Same industry, same product, but such contrasting numbers? The answer lies in the markets these companies cater to. Companies (read: PotashCorp and Mosaic) that rely on global markets such as India or China for sales were in for a rude shock this year when these countries cut back purchases drastically on account of stockpiles, weather, and economic issues. Whatever sales these companies derived came largely from North America as farmers stocked up for fall planting season. PotashCorp was probably the best example of this -- its domestic potash shipments were 26% higher than last year.

To cut it short, Intrepid is safe because it produces and sells everything in the U.S., exporting just 4% to 5% to Latin America and Canada. For a company dealing in a nutrient like potash, that sounds like a win-win situation right now. In fact, not many are aware that Intrepid is the largest potash producer in the U.S. The company’s higher sales even during a seasonally weak period indicate another thing: it has a loyal and strong customer base.

Lesser-known products do not add much value.

Intrepid is the only producer of langbeinite, a nutrient that is made of potassium, magnesium and sulphate. Mosaic makes it too, but langbeinite is such an insignificant part of its business that it doesn’t even find separate mention on its financials. Mosaic is actually a phosphates and potash company, while Intrepid’s fortunes are more closely tied to langbeinite. Accounting for 10% of Intrepid’s total sales, the mineral has contributed positively so far. So while phosphates dampened Mosaic’s performance (in its last quarter, phosphates segment sales slumped 30%, pulling its total revenue down by 19%), langbeinite actually boosted Intrepid’s top line.

What’s interesting is that while fertilizer companies are reeling under the pressure of low or flat nutrient prices, langbeinite prices in this past quarter improved a whopping 34% from the year-ago period. Clearly, there is good demand for this specialty product and supply is limited, otherwise no market would have supported higher prices. Who benefits -- Intrepid.

If you’re away from rich-resource reserves, you have nothing to gain.

PotashCorp, Mosaic as well as Agrium operate out of Saskatchewan, Canada (which has rich potash reserves), while Intrepid functions from the U.S. That can’t help anyway, right? Well, it does, at least in one way if not too many.

Unlike in the U.S., Saskatchewan requires companies to pay additional royalties and taxes, which directly add to costs. As a result, Intrepid’s saves a fairly good amount on costs. To find out more, I dug into Mosaic’s financials, and this is what I came up with -- Mosaic’s third-quarter potash gross profits were $459 million which included expenses relating to Canadian resource taxes and royalties. On calculating, I found these expenses to be around 8.6% of potash sales. Similarly, PotashCorp shelled out $62 million as provincial mining and other taxes in the last quarter when its selling and administrative expenses were just $53 million. Agrium’s Canadian tax liability increased 51% during the first nine months of the year compared to last year.

So Intrepid can easily save some bucks. With mines located close to end markets, there are good savings on transportation costs as well.

Smaller companies can’t do much with money.

One of the biggest projects Agrium is busy with is a one-million ton expansion at its potash mine in Saskatchewan, which should increase annual capacity by 50% once completed. Likewise, a major chunk of Mosaic's capital spending is directed toward its five-million ton potash expansion program. What does this have to do with Intrepid?

Well, Intrepid is smartly spending on projects that will not only add capacity but also lower costs. It is one of the few companies that use solar evaporation techniques to produce potash. Work at its HB Solar Solution Mine is in full progress following an approval won some months back. 25% extra capacity at reduced production costs is what the project will result in once operational from next year (expected).

Intrepid’s new compaction plant should also be ready by mid-next year, enabling it to produce more granular potash which commands roughly 20% higher price compared to standard potash. That demand for granular potash is on the rise is also evidenced by PotashCorp’s investments to add its capacity by more than 1 million ton.

The Foolish bottom line

Despite concentrating primarily on one nutrient and one market, Intrepid’s operating margins and net profit margins are at impressive levels of 35% and 24%, respectively, for the past twelve months. Clearly, the small fry is handling its business well. And what if I tell you it is a debt-free company? So not only is Intrepid free from the tensions of payment obligations, it also has the leeway to easily acquire debt if required for future growth programs.

I am going to watch this one closely. If you want to do so too, simply add Intrepid Potash to your personalized stock watchlist. Click here to do it.

Nehams has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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