Add some fertilizer and watch it grow. That seems to be the case with Compass Minerals International (CMP, Financial), maker of highway de-icing materials, water-treatment products and plant fertilizers. Any favorable investment thesis must take a long-term view as the maker of fertilizer will face struggles in the short-term due to industry stagnation.
The company has been far from a slam dunk financial success over the last several years and performance has been quite uneven. But Compass Minerals is well positioned to weather such storms and deliver solid returns into the future.
Moderate financial success may make way for a better future
Looking at Compass Minerals’ earnings results over the last year lends a closer look. Three out of four quarters, the company posted positive earnings per share and, in two of them, it outperformed analyst expectations. That means the company unperformed market expectations in two quarters as well; including posting a loss of 19 cents per share in second-quarter 2017. The second half of 2017 was better, however, with Compass Minerals posting earnings per share of 65 cents and $1.66 in the third and fourth quarters respectively. In fourth-quarter 2017, the earnings surprise was 11.4% over expectations.
Revenue growth has been fairly consistent, although expenses have varied quarter to quarter. Total revenue in 2015 was $1.1 billion, which grew to $1.14 billion in 2016. Those are perfectly acceptable, healthy numbers. Due to increased expenses in 2016, however, gross profit was down over 10% from the previous year.
Uneven financial performance is due to a mixture of industry stagnation and Compass Minerals adjusting to shifting economic conditions. The goal for the company’s management should be to get a plan in place to create consistent revenue growth, even in the face of external pressures.
Climate change exacerbates cyclical business risks
The long-term demand for Compass Minerals’ salt and specialty fertilizer products looks positive. Those markets should see modest demand growth as well as price increases, both factors that will boost the company’s bottom line.
Essentially, Compass Minerals’ products are seasonal and vary market to market and season to season. For instance, their de-icing highway ice depends on the relative severity of winter conditions. Climate change and varying weather patterns therefore affect demand. The last few winters have been mild and have affected the company’s sales and demand for their products. Investors should be aware they are betting on a stock with strong seasonal implications, but this should prove a successful opportunity for investors who can be patient.
This general industry problem of being tied to weather patterns is one with which Compass Minerals will have to tend in the future, and they must position themselves to do so. Luckily, it holds a strong position versus competitors.
Other industry experts are split on Compass Minerals’ prospects moving forward. Some are more bullish than others. Last week, Credit Suisse downgraded the company to underperform, citing “seasonal conditions in Brazil, mild winters, pressure on sulfate of potash premiums as muriate of potash prices fall, and increasing transportation costs driven by driver shortages, fuel expenses and capacity constraints.”
Competitive advantages in place for the long-run
Concerns such as those aired recently by Credit Suisse are worthy of consideration, but they take a somewhat short-term horizon view of a company that can only be fairly assessed with long-term time horizon in mind. Long-term demand for Compass Minerals’ products is solid, but short-term demand is somewhat at the whim of weather patterns and rising input costs can prove problematic. But Compass Minerals is well positioned to hunker down for the long term.
The company has several competitive advantages over other players in the industry, including strong assets and strategic positioning. First, its rock salt mine in Ontario is the largest in the world, with particularly thick and prosperous deposits. The more salt available, the better. Also, this mine is strategically located in the Great Lakes region of the U.S. and Canada. Well positioned, this mine also has an advantage its competing mines do not have: a massive deep-water for shipping. This allows large freight ships to transport large quantities of rock salt at an efficient, cost-effective and rapid pace. Transportation is one of the largest elements of cost of goods sold (COGS) for rock salt manufacturers, and so this transportation advantage translates to a larger, significant general industry advantage for Compass Minerals.
Further, Compass Minerals’ cost advantages are not solely in their rock salt business. Significant advantages also exist in the specialty fertilizer business, including the market for sulfate of potash. Compass Minerals is the leading producer of sulfate of potash specialty plant fertilizer in North America, and therefore holds a size and access advantage over its smaller competitors. Such fertilizer is higher-end and is usually used on more expensive types of crops, such as avocados and almonds. As demand for these specialty products becomes more acute thanks to shifting consumer preferences, Compass Minerals will benefit.
The verdict
The advantages of cost, size and positioning should prove profitable to Compass Minerals moving forward, and give it the edge to lead its industry for years to come despite shifts in weather patterns and commodity price fluctuations. The stock is not flashing massive buy signals right now, but for an investor looking for long-term appreciation, this one might be worth a look.
Disclosure: I/We own no stocks discussed in this article.
