As a company that generally keeps a low profile, Compass Minerals International Inc. (CMP, Financial) has given a pretty solid 34.7% return on equity in the last 12 months. The share price of the company had jumped up by about 4% last week on back of announcement of quarterly results but has been trending downwards since. Now, the stock has lost that result-based gain and is continuing the trend of falling which has been seen for much of the last month, languishing close to its 90-day low point. Are there fundamental reasons to stay away from this mineral producing company?
Pour some salt on
Despite a growth of over 20% in quarterly earnings, investors were unhappy with the reduced sales from the company’s main business, its salt segment. Heavily dependent on the vagaries of nature, the de-icing salt business does well in harsher winters, as in the same quarter last year and not so well in milder winters, such as the quarter gone by. Despite a 20% fall in year-on-year quarterly sales volumes, the company did well because of an average 17% increase in the sale price of its de-icing products. While investors expected some decline in revenue, perhaps the extent of it was difficult for some to digest.
Potash and agro business
A somewhat unique offering from Compass is its sulphate of potash, which is produced in a highly specialized way and is used for crops that need potassium but react badly to chloride, such as almonds or tomatoes. Sulphate of potash manufactured by Compass sells for more than twice the price of regular commercial potash in North America currently, which goes to show the advantage it enjoys in this sector. In the quarter gone by, the company sold lower volumes of agricultural products but still saw 11% rise in sales revenue. The company seems to be facing some raw material supply constraints in this segment, but it is expected to have an impact of less than 2% on overall output.
Strong and strategic asset base
Other than owning the world’s largest salt mine located in Goderich in Ontario, Canada, Compass Minerals also owns United Kingdom’s biggest salt mine in Winsford, Cheshire. With the UK as an important market, the mine there is obviously a very strategic and fruitful investment. The mine in Ontario is also very well-placed to serve the domestic Midwest region, which sees harsh winters regularly and is a very big market for the company’s salt business. Being located close to the Midwest also makes transportation easier, and cheaper, across its chain of storage facilities spread across the region, and these depots help keep the salt supply uninterrupted through the harsh winter months.
Compass Minerals’ sulphate of potash manufacturing facility in Ogden, Utah is the only one of its kind in North America. The specific geography of the location has obvious merits, since the process of manufacture involves the natural process of solar evaporation of naturally occurring brine from the Great Salt Lake just a few miles away. These factors are not easy to replicate, creating something of a barrier to entry for competition.
Conclusion
The company has shown it can increase earnings despite lower sales in a business that is cyclical, dependent as it is on changing seasons and weather patterns. The management may not have met all of investors’ and analysts’ expectations but it is still doing a good job of growing the company, backed by unique assets and quality products. Our recommendation for long-term investors is a strong BUY for this stock, which is currently trading at a 10% discount to its 52-week high.
