Is Intrepid Potash the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Intrepid Potash (NYSE: IPI  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Intrepid Potash.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 23.2% Pass
  1-Year Revenue Growth > 12% 28.7% Pass
Margins Gross Margin > 35% 45.5% Pass
  Net Margin > 15% 24.9% Pass
Balance Sheet Debt to Equity < 50% 0.1% Pass
  Current Ratio > 1.3 6.32 Pass
Opportunities Return on Equity > 15% 12.1% Fail
Valuation Normalized P/E < 20 15.60 Pass
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
       
  Total Score   7 out of 10

Source: S&P Capital IQ. Total score = number of passes.

With seven points, Intrepid Potash puts up a good score. Even as the entire potash-based fertilizer group has come under fire, Intrepid has some attractive traits that make it stand out from its larger peers.

The agriculture sector has had an excellent past couple of years, and all indications suggest those favorable conditions are likely to continue. Warm weather over the winter helped spur record corn plantings, and corn is particularly fertilizer-dependent.

Given Intrepid's strategic position as the biggest potash producer in the U.S., it has a competitive advantage over Canadian rivals PotashCorp (NYSE: POT  ) and Mosaic (NYSE: MOS  ) . Canada's three-member cartel, which also includes Agrium, may have gotten recent orders from China, but Intrepid is poised to see the most significant direct impact from high U.S. demand.

One big obstacle to Intrepid's success may come from other segments of the fertilizer industry. Nitrogen-based fertilizer companies Terra Nitrogen (NYSE: TNH  ) and CVR Partners (NYSE: UAN  ) have held up better than potash producers, as low natural-gas prices have kept costs low a key input for nitrogen fertilizer production. Of course, different crops require different nutrients, but nitrogen is a key need for corn.

Intrepid makes enough money that a substantial dividend would be the easiest way for Intrepid to keep moving toward perfection. The company's reluctance to do so may signal concerns about how sustainable current ideal conditions in the industry are, but for now, investors may want to take advantage of a beaten-down share price to take a close look at potash stocks like Intrepid.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Intrepid Potash may not be the perfect stock, but we've got some ideas you may like better. Let me invite you to learn about three smart long-term stock plays in the Fool's latest special report. It's yours for the taking and is absolutely free, but don't miss out -- click here and read it today.

Click here to add Intrepid Potash to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of PotashCorp. 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 Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 14, 2012, at 3:00 PM, axiom71 wrote:

    In regards to Dividends. The April 26th News about the BLM Approval for their new HB Solar Solution Mine Project is the explanation. Intrepid awaited this decision for some time and it looks as though management had prepared for the approval by all but eliminating their current debt in preparations for the commencement of construction:

    "We expect to invest a total of approximately $200 - $230 million to construct the HB Solar Solution mine, with approximately $35.3 million invested to date. Further, we anticipate that the first production from the HB Solar Solution mine will begin in late 2013 following the initial evaporation season, with increasing production in 2014, and a ramp up to full production expected in 2015, assuming the benefit of average annual evaporation cycles applied to full evaporation ponds. The estimated annual production from the HB Solar Solution mine is expected to be 150,000 to 200,000 tons of potash."

    This additional production capability would add 15-25% more potash capacity to IPI's annual production, helping fuel their growth and to meet demand.

    While I wouldn't hate the idea of an extra-dividend to reward stock holders for their patience, I wouldn't expect them to start issuing quarterly dividends until this expansion is completed.

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