Innophos Holdings: A strong growth stock, at the right price
Innophos Holdings Inc. (Nasdaq:IPHS) is a specialized company with a highly diversified product base: it makes phosphates that are used in a multitude of household and industrial products, from food and laundry detergent to fertilizer and pharmaceuticals.
And like the company’s vast product base, its investment story is a clever concoction of ingredients. Investors and analysts who follow Innophos have recently identified a number of distinct reasons to buy its shares, from its broad diversification that will help protect it from recessionary downturns in certain business segments, to its recent aggressive product price increases. Those price increases were adopted partly in response to price hikes in the raw materials that Innophos buys, but are now expected to produce a net gain for Innophos even after higher materials costs are factored in.
Shares of Innophos, which was founded in 2004 and went public in 2006, closed at a new 52-week high of $26.90 on Thursday. Bear Stearns analyst Scott Burk in May increased his price target on the rapidly rising stock by a full $5 to $32, saying that the company’s first quarter was very strong and its planned price increases “are passing through faster than we previously modeled.”
“Recent discussions with management affirmed … indications that price increases of 50% to 60% will be effective six to nine months before any appreciable cost increases,” Burk wrote. He said he expects this “mismatch” of prices to last through the first quarter of 2009.
As a backdrop to those generally strong fundamentals, there has been a growing expectation in recent months that Innophos’ largest shareholder, the private equity firm Bain Capital, would take advantage of the company’s strong stock price and begin reducing its stake, potentially spurring some near-term weakness. On Thursday, the company announced that Bain had indeed decided to sell a large chunk of its stock. In a prospectus filed the same day, Innophos said that Bain’s planned sale of 4 million shares would reduce its stake in the company to 29.1% from a previous 48.3%.
Burk noted in his research report that Bain’s sale “could offer an attractive entry point in the short term.”
In the two years that it has publicly reported its financial results, Innophos has shown strong growth. Its 2007 revenues rose to $579 million from $541.8 million the year before, while its net loss narrowed dramatically to $5.4 million last year from $32.8 million the year before.
Like Bear Stearns’ Burk, most analysts who follow the company see that growth spurt continuing. Four analysts who track revenues project a rise to $723.7 million this year and $768 million next year. Three who project net income are projecting earnings per share of $3.44 in 2008 and $1.91 in 2009. While Innophos’ revenues are expected to grow steadily, its earnings have been impacted by debt payments and large fluctuations in operating costs.
All this amounts to a fairly complex investment picture for Innophos. On the one hand, the company’s extensive base of products have made Innophos a supplier to many Fortune 500 companies that use its phosphates for everything from adding texture to cheese, to adding cleaning agents to toothpaste.
Innophos holds a number one or number two position in all the markets it serves, and is always working to expand into new product markets and geographic regions. Recently, for instance, it developed a new nutritional supplement that beverage manufacturers can use to add calcium and phosphorus supplements to their drinks. The company is also actively working to expand its business in China and South America.
However, one of the key reasons for the stock’s recent rise is the price increases that it is passing through to its customers. The company has been clear that this is most likely a short-term positive and analysts such as Burk note the effect may neutralize by next year.
Moreover, as a company whose activities involve the use of many hazardous materials, Innophos is subject to extensive environmental regulations, and potentially steep compliance costs.
“Maintaining compliance with health and safety and environmental laws and regulations has resulted in ongoing costs for us,” Innophos said in its latest prospectus. “Currently we are involved in several compliance and remediation efforts and agency inspections concerning health, safety and environmental matters.
And most immediately, there is the looming sale of the Bain shares. Bain has not yet disclosed the timing of those stock sales, but Innophos’ stock will likely see more
pressure when Bain begins selling.
Some analysts think all these bearish factors are reason for investors to stay on the sidelines. Credit Suisse in early May downgraded the stock to “neutral” from “outperform.”
Innophos is clearly on a run right now and it’s definitely worth a closer look from potential investors who could likely profit over the long term from the company’s broad and growing business. But those investors should wait for the buying opportunity of this stock, which will probably contract from its current high before it rises again.
About the Author
Contributing author Andrea Orr has worked as a financial and business journalist for more than 15 years in New York, Los Angeles and northern California.
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