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)
WHY CMP:
Based in
Overland Park,
Kan., the company derives a
bout
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.
Fundamentals:
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.
