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Compass Minerals Intl. – For Global Warming Doubters

September 10, 2009 | About:
Compass Minerals (CMP) Sep. 9, 2009 close: $57.60

52-week range: $36.40 (Oct. 24, 2008) - $65.75 (Jan. 6, 2009)

Dividend = $0.355 quarterly = 2.46% current yield


Compass produces rock salt and sulfate of potash and magnesium in North America and the United Kingdom. Their products are used for highway deicing, consumer deicing, water conditioning, consumer and industrial food preparation, agriculture, and industrial applications. After a leveraged buyout in 2001, CMP came public again on December 17, 2003 at $13/share.

Cold, icy weather makes for more rock salt usage so CMP is hoping the global warming fanatics are wrong. About 80% of sales come from salt with the balance from its fertilizer products. Sales and earnings have grown nicely since the IPO and the highly levered balance sheet has been gradually strengthened through debt repayment and strong cash flow in excess of capital spending needs.

2009 is on track to hit all-time high earnings. First half (2009) saw EPS of $2.36 versus $1.62. Full year earnings estimates now range from about $5.13 to $5.26 versus 2008’s $4.93. Next year’s expectations are running between $5.14 and $5.42 although much will depend on the severity of winter weather.

The fertilizer component of their business is a nice counter balance to the rock salt business and seems poised to grow with increases in the world’s population.

Here are CMP’s post-IPO, per share numbers from continuing operations as reported by

Value Line:

Year ........ Sales ....... C/F ......... EPS ......... Div. ............ B/V ...... Avg. P/E

2003 ....... 19.90 ...... 2.41 ....... 1.01 ......... Nil ........... d.4.25 ....... 13.6x

2004 ....... 22.50 ...... 2.95 ....... 1.57 ........ 0.94 ......... d.2.86 ....... 12.3x

2005 ....... 23.32 ...... 3.00 ....... 1.62 ........ 1.10 ......... d.2.48 ....... 14.9x

2006 ....... 20.58 ...... 2.98 ....... 1.69 ........ 1.22 ......... d.2.03 ....... 16.1x

2007 ....... 26.51 ...... 3.36........ 2.09 ........ 1.28 ......... d.0.14 ....... 16.5x

2008 ....... 36.00 ...... 6.32 ....... 4.93 ........ 1.34 ........... 1.99 ........ 12.2x

2009* ..... 31.60 ...... 6.75 ....... 5.20 ........ 1.42 ........... 3.70 ........ 10.5x

*2009 data includes consensus estimates

At today’s close of $57.60 Compass Minerals trades at about 11.1x this year’s and 10.9x next year’s expectations.

Dividends were initiated in 2004 and have been increased in each year since. The current yield of 2.46% is better than the rates that bank CDs and short-term treasuries now pay.

A likely rebound to at least a 12 multiple leads me to a target price of over $62 /share by early in 2010. Standard and Poors rates CMP as 4-Stars (out of 5) and figures $65 as a 12 month goal. Morningstar assigns Compass their highest, 5-Star ranking, and recently raised their ‘fair value’ from $83 to $85 per share. Value Line notes CMP’s stock ‘price growth persistence’ puts it in the top 1% of all 1700 stocks in their research universe.

That $62 goal seems quite reachable as CMP peaked at $87.90 in mid-2008 and at $65.75 so far in 2009 while fundamentals are better now than ever before.

Here’s a somewhat conservative buy/write play that makes sense to me.

............................................................ Cash Outlay ............. Cash Inflow

Buy 1000 CMP @ $57.60 /share ................. $57,600

Sell 10 CMP Mar. $60 calls @ $5.20 /share ................................... $5,200

Sell 10 CMP Mar. $60 puts @ $8.00 /share .................................. $8,000

Net Cash Out-of-Pocket ............................ $44,400



If Compass Minerals climbs to $60 or better (+ 4.2%) by March 19, 2010:


• The $60 calls will be exercised.

• You will sell your shares for $60,000.

• The $60 puts will expire worthless.

• You will likely have collected $710 in dividends.

• You will have no further option obligations.

• You will end up with no shares and $60,710 in cash.

That’s a best-case scenario total return of $16,310/$44,400 = 36.7%

achieved in just over 6 months on shares that only needed to rise by 4.2%.


What’s the risk?

If Compass Minerals remains below $60 through March 19, 2010:

• The $60 calls will expire worthless.

• The $60 puts will be exercised.

• You will be forced to buy another 1000 CMP shares.

• You will need to lay out an additional $60,000 in cash.

• You will likely have received $710 in dividends.

• You will end up with 2000 CMP shares and $710 in cash.


What’s the break-even on the whole trade?

On the original 1000 shares it’s their $57.60 purchase price less

the $5.20 /share call premium = $52.40 share.

On the ‘put’ shares it’s the $60 strike price less the $8.00 /share

put premium = $52.00 /share.

Your break-even would be $52.20 /share excluding yield and $51.84 /share

including dividends.


CMP shares could fall by up to $5.76 share (-9.9%) without causing a loss on this trade.


Summary:

Compass Minerals International is a wide-moat resource company with growing earnings, trading at a modest valuation. A reversion to even the low end of its historical P/E range would see a better than $62 target price by early 2010.

The 4.2% rise to $60 would allow for a total return of over 36% in less than 6.5 months while the break-even point of $51.84 would provide a margin of safety of almost 10% from the trade’s inception price.


Disclosure: Author is long CMP shares and short CMP options.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.gurufocus.com/peter_lynch.php
http://www.TalkMarkets.com
http://www.MutualFunds.com

Visit Dr. Paul Price's Website


Rating: 3.8/5 (4 votes)

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