Selling Puts on Intrepid Potash – High Return with Downside Protection $IPI

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Market volatility creates awesome opportunities. Today, I’m going to be talking about a name I’ve followed for some time and actually currently own the stock. But I’m not talking about buying the stock – I think selling cash-secured IPI puts is a solid risk / reward.

Let me break it down. First, IPI is at $28.7 / share at the time of writing. You can sell the Dec 2021 $17 strike put and collect a $1.40. So effectively, you’re buying the stock at $15.60 in a worst case scenario. If nothing happens, you collect 8.2% ($1.4 / $17.0), which is 15.3% annualized – which is above my hurdle rate of return.

Is IPI Cheap?

Currently, estimates for IPI show $50MM of EBITDA for 2021, which I think is too low. Even so, if it is correct, here is the current capitalization. Note, IPI does have a $10MM PPP loan which it expects to be forgiven, so I subtract that out. Trading at 7.7x isn’t bad. Buying at $15.6 with the estimates staying flat equates to 4.3x…

Net / net you can see the balance sheet isn’t overly levered, which is good for a cyclical company (selling mainly potash for agricultural end uses).

Why do I think estimates are too low?

Look at potash prices – they are at levels we haven’t seen since 2014-2015. Yet, consensus is saying IPI is only going to do EBITDA on par with 2018 levels… hm. IPI had to shutter some high cost potash capacity, but back in 2013-2014, the company was doing ~$100MM of EBITDA.

IPI has been announcing price increases too here. Trio is mentioned in this press release, which is a product that has been basically breakeven (or negative) gross margin the past two years. Do you think that will continue in this environment? Probably not. They announced a $100/ton price increase. For context, the average price in Q1’21 was $233/ton. Maybe they don’t get it all, but that price increase should fall straight to the bottom line.

They also have an Oilfield Solutions segment in which they essentially provide water to energy companies that are fracking. It’s historically provided ~$18MM of sales, which is very high margin (54% gross margin in 2019). That should also improve this year as we’ve seen a recovery in rig count.

Bottom Line

For IPI to hit $17 by year end, a lot would have to go wrong from current conditions. Q2 and Q3 would have to be really disappointing, which I just don’t see.

Bottom line: this is a great return for me and I’d be happy to buy IPI at $15.6. I like the stock, but for those who don’t want to own a cyclical and need a place to park cash, this seems like decent risk / reward to me.

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