Here's Why Intrepid Potash Dropped as Much as 16.6% Today

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What happened

Shares of Intrepid Potash (NYSE: IPI) dropped nearly 17% today after the fertilizer producer announced fourth-quarter and full-year 2017 results. The company was in full turnaround and diversification mode last year, and although progress was made, it trickled in at a slower pace than Wall Street preferred. More specifically, the business is not yet generating enough cash flow to stem the need for debt or share offerings (and therefore dilution) to fund the business.

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That said, it's important to note that the market environment improved in the second half of 2017. Management is confident that "solid market fundamentals" will deliver continued improvements for Intrepid Potash in the first half of this year. As of 11:25 a.m. EST, the stock had settled to a 14.2% loss.

So what

Part of the turnaround strategy enacted last year included ramping up production of its Trio fertilizer product and reducing the output of potash. That made sense at the time, especially considering potash selling prices had declined for several consecutive years. Unfortunately, the new production strategy was ill-timed, as potash prices began to recover in 2017 while Trio prices slipped.

Metric

2017

2016

% Difference

Total revenue

$157.6 million

$210.9 million

(25%)

Total gross profit

$5.8 million

($29.2 million)

N/A

Total operating income

($14.4 million)

($57.7 million)

N/A

Potash revenue

$95.5 million

$159.5 million

(40%)

Potash gross profit

$15.7 million

($28.6 million)

N/A

Potash price per MT

$238

$195

22%

Trio revenue

$62.0 million

$51.4 million

21%

Trio gross profit

($9.9 million)

($0.6 million)

N/A

Trio price per MT

$196

$287

(31%)

As the full-year 2017 results indicate, Intrepid Potash improved its bottom line compared to 2016 by simplifying its business and focusing on operating efficiency. So although total revenue dropped, the company's extensive use of low-cost solar evaporation ponds for production greatly aided gross profit and operating income. Unfortunately, producing half as much potash last year as it did in 2016 didn't allow the business to take advantage of the improvement in selling prices, while increasing Trio production actually hurt the business as selling prices collapsed by nearly one-third.

Now what

Intrepid Potash remains an intriguing stock. While the business is clearly improving, it's still not clear to investors if the improvements will be enough. After all, the market and selling prices -- both out of the company's control -- have to cooperate for the turnaround strategy to be a success. Management said it will begin strategically selling built-up inventory in 2018 to take advantage of higher selling prices, which could prove to be an important catalyst for the business moving forward. For now, investors need to continue to be patient.

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Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.