Based on Monday morning's earnings report and some follow-up information from my analyst team (ahem - readers), we've come to the conclusion that Intrepid Potash (IPI) prices their fertilizer 70% by contract, 30% spot in each quarter. For the contracted portion, if last quarter is a representative sample, they priced the contracted portion with a 4 month lag. Assuming April 1 'contract' pricing came in December 2007-January 2008, we should begin to see meaningful upside in Q2. Q3 (starting July 1) should price in March 2008 and the full effects of the rampant bull in potash pricing be reflected by then. A risk of course is if potash pricing falls in the back half of the year, something I would find as a very small probability:
[Mar 27: Canpotex Potash Contracts Secured with India @ $625][Apr 2: Potash Makers Already Talking $750, up from $625][Apr 16: Chinese Agree to $576 Price Point for Potash][Apr 23: Potash Hits $1000 on Spot Market]
With that said, I still want to hear myself tonight, but going with my analyst team, I'm creating a starter stake in Intrepid Potash here in the $48s, with a 400 share buy or $19,600. Due to market conditions and potential for commodity pullback, plus the need to listen to the conference call, I'm starting small - this is a 1.6% stake. I would like to add to this position in the low to mid $40s on a sector pullback, or if the name starts to run on me, I'll add as well.
I don't expect this to take off tomorrow, but if this pricing mechanism outlined above is accurate, the current 2008 estimate of $2.24 EPS should be surpassed by Dec 31, 08; but this will be a very backloaded year.With that said, coal is a 2009/2010 story and that has not stopped the stocks from creating massive moves in 6 weeks. So we won't know when the market will recognize inefficiencies - you just have to identify them and be ready to latch on once the whale starts swimming.
This new information makes me far more bullish on this name than I was 24 hours ago; again every $100 increase in potash = 70 cents EPS to Intrepid according to their filing.
We estimate that every $10 per ton increase in the price of potash will have a pro forma annual earnings impact of approximately $0.07 per share.
According to their filing this is their current pricing scheme
Q1 Average: $390 (Jan $357, Feb $397, Mar $417)
Q2 Looks like this - Apr $503, May $532, Jun $582
As an added bonus, it appears the vast majority of their sales are domestic in nature; with China short-changed in their potash this year, I can see certain Asian friends knocking on their door in the coming year. Again... just about everything is about China nowadays - but while they can slowdown their orders of steel, concrete, metals - keeping their people warm (coal) or feeding them (fertilizer) is going to be a very difficult thing to stop doing; so even if China does implode under its own supersonic growth rate, feeding and energy needs should not suffer. (Note that does not mean American stockholders of companies in these areas won't panic-sell on first hint of China slowdown, but that's just American stockholders being American stockholders - very little to do with fundamentals)
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