Monday, September 17, 2012

A Cold winter will make Compass Minerals a hot stock to own!

This article is a summary of what I read in Barron's and little bit of my own fact checking. I thought this was interesting idea to point to readers to look into this further.

  • Compass Minerals International (CMP) – Current price at $72.29
  • Potential Upside by Industry Estimates: $ 15 – 20 per share
  • Market Capitalization: $2,390M
  • Cash: $147M; Total debt: $484M
  • Shares Outstanding: 33.11M
  • Operating Margins: 16.50%; ROE:29%
  • EPS 2012E: $3.43; EPS 2013E: $5.15; Div Yield: 2.7%
  • Sector: Basic Material; Industry: Industrial Metals & Minerals
Sources: Thomson Reuters & Yahoo

What does CMP do?
Compass Minerals International (CMP) is a producer of minerals, including salt, sulfate of potash specialty fertilizer (SOP) and magnesium chloride. As of December 31, 2011, the Company operated 12 production and packaging facilities, including the rock salt mine in Goderich, Ontario, Canada, and the rock salt mine in the United Kingdom in Winsford, Cheshire. Its solar evaporation facility located in Ogden, Utah, is a SOP production site and a solar salt production site in North America. Compass Minerals provides highway deicing salt to customers in North America and the United Kingdom and specialty fertilizer to growers and fertilizer distributors worldwide. It also produces and markets consumer deicing and water conditioning products, ingredients used in consumer and commercial food preparation, and other mineral-based products for consumer, agricultural and industrial applications. In January 2011, the Company acquired Big Quill Resources, Inc. (Source: Google)

Based in Overland Park, Kan., the company derives about 80% of its annual revenue from the sale of salt, much of it used by municipalities to de-ice roads in winter. Following the warmest winter in two decades, however, many cities and towns are sitting on large inventories of rock salt. Adding to the pain, a tornado damaged a Compass salt mine and evaporation facility in Canada in August 2011, while a rainier-than-normal summer last year meant less evaporation at a plant that produces sulfate of potash. The fertilizer, which accounts for the other 20% of sales, is harvested by evaporating water from the Great Salt Lake. In Ontario, Compass operates the world's largest underground rock-salt mine. If weather patterns follow the historic trend with  a cold winter in 2012, CMP might be a stock worth owning.

Potential Catalysts:

Weather Patters:
Compass benefits whenever municipalities spread rock salt, usually after an inch of snow has fallen. Last winter, there were 89 snow events in Compass territories, which encompass the U.S. Midwest and Canada, down from 203 in the prior winter and almost half the average of the past 10 years. However, about 90% of the time, an exceedingly warm winter with well-below-normal snowfall is followed by a winter with 10% to 25% more snow than the average. Expectations are that the coming winter to last longer than usual, too, with snow more than usual.
Additionally, CMP produces fertilizer used on high-end crops, including fruits, vegetables, and nut trees. Its fertilizer customers, typically on the West Coast and in the Southeast, haven't been harmed by the drought in the Midwest. Sales and prices of sulfate of potash have been strong, pushing that segment's revenue up 14% in the second quarter, to $56.2 million. But because of last year's cloudy weather, the cost of producing SOP rose and profit margins were compressed. Second-quarter operating income in the segment fell 26%, to $13.9 million, from the prior year's total. However, evaporation has improved greatly this year, owing to ample sun and hot temperatures at the Great Salt Lake. The company hopes that population growth and rising demand for healthy foods will bolster demand for SOP.

Irreplacable Assets:
CMP has an asset base that’s very difficult to replicate. The company owns the world's largest rock-salt mine, in Goderich, Ontario, on Lake Huron, from which salt can be shipped inexpensively on barges. Keeping transportation costs low is key because they account for 30% of the selling price. CMP also benefits from having its largest salt mine located near the North American snow belt, in the North Central states. Compass is the largest provider of rock salt in North America, competing against Cargill and K&S Group, the owner of Morton salt. Sales are likely to stay soft through the end of the year, as customers work off inventories and prices fall. Likewise, costs could be higher than normal because the mines won't be operating at full capacity and the company has had to repair damage caused by the tornado. At least Compass has a flexible work force that can be dismissed when times are tough and recalled when business improves. In the second quarter, sales in the salt segment fell 6%, to $119.9 million, and operating income fell 5%, to $12.9 million.

This year, the company is expected to earn $109.9 million, or $3.43 a share, on revenue of $1 billion, down from last year's already depressed earnings of $160.4 million, or $4.79, on revenue of $1.1 billion.
Despite that, CMP has stayed profitable and maintained a healthy balance sheet, with only $336.5M of net debt. Moreover, it generates enough cash to pay an annual dividend of $1.98 a share, for a yield of 2.7%.  Industry estimates that CMP may earn $5.15 a share next year. That growth could command a price/earnings multiple of 17 times 2013 estimated earnings, up from 14 times earnings for 2012. CMP historically has produced relatively steady earnings gains, suggesting that it deserves an above-market P/E. It typically has enjoyed 1% to 2% annual growth in demand and 3% to 4% price increases. At 17.5 times earnings, the stock would be worth about $90 a share, or 25% more than its recent price.


  1. Companies in the mining business can have great potential if you can manage to select the right companies at the right time. Compass minerals seems more like a chemical company than a mining company. The company could be attractive to a large multi national company involved in the chemical and mining business.