Why did Intrepid Potash stock sink 9% after its earnings release? (Part 3 of 4)
Earnings calls are important because they provide investors with an opportunity to learn what’s going on in the industry. Sometimes they bring investors new perspectives regarding the future of a company or industry, but note that they often talk down the negatives, and can potentially mislead investors.
IPI achieved a higher average net realized potash sales price
For the fourth quarter of 2013, IPI’s average potash sales price came in at $338 per ton. This was 15.5% higher than the average competitor sale price. (Note:this number excludes Agrium.) But investors should understand that IPI has historically charged higher potash prices than its peers because it’s situated closer to its clients, most of which are located in the Corn Belt of the Midwestern United States.
COGS (the cost of goods sold) increased 8% compared to 2013, which investors should pay attention to because it affects earnings and share prices. Investors should be aware that IPI already has one of the highest COGS of potash in the industry. IPI’s potash COGS per ton for the fiscal year ending 2013 was 85.6% higher than that of its peers, such as Potash Corp. (POT) and Mosaic Co. (MOS).
Steps to reduce SG&A and operating costs
Robert P. Jornayvaz, executive chairman of the board at IPI, stated that, due to the difficult market condition, IPI has taken steps to reduce its SG&A (selling, general, and administrative) and operating costs. Jornayvaz mainly referred to the $15 million cost-savings program announced a couple weeks ago. This program includes a 7% cut in the workforce and cuts in executive compensation.
Capital expenditure reduction
Over the past couple years, IPI has aggressively invested in new production facilities. IPI operates within the U.S. market only. Since the company is small, it enjoys the advantage of being able to increase production and sales without negatively affecting industry supply and demand balance—unlike its larger peers.
The HB Project, a new low-cost production facility, has already started operating and is expected to increase potash production by 20% to 25% and reduce overall cost of goods sold per ton by 11%. After years of increasing investment, IPI is now planning to put investments on hold and generate profits from the new facilities. All other variables held constant, investors can expect higher earnings and positive free cash flow for 2014.
Management sees a positive future for Langbeinite
Langbeinite posted strong results compared to most fertilizers. Despite a weak fertilizer market, Langbeinite experienced relatively constant sales price and volume compared to 2012. Management was positive regarding the product’s future, stating that demand has consistently been notably higher than supply.
Browse this series on Market Realist:
- Part 1 - Intrepid Potash’s 4Q13 earnings: Why IPI has lost 20% of its value
- Part 2 - Why poor potash performance hurt Intrepid Potash’s revenues in 4Q
- Part 4 - Key trends Intrepid Potash investors should watch for in 2014
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