Defensive Play - Compass Minerals

[Running_Man]

In general I am very negative the market but I do believe that Compass Minerals (CMP) Price = $40.00 has various attributes that will aid it going forward to overperform the market while paying a good dividend.

Owner of the largest salt mine in North America I would expect their 4th quarter earnings to significantly exceed expectations as ice control salt usage should be very good with the December snowfalls so significantly. This will help the current year with additional sales but more importantly allow for rebuilding of inventory at higher prices as users scramble for salt. They have been investing in increasing their salt mining capabilities and are the low cost producer in this area. The reduction in inventories this winter should result in higher bid results for their ice control market in the winter of 2008-2009.

They are expected to call a total of 303 million in debt and reduce their interest rate from 12.9 percent to 7 percent which translates into an increase in EPS of about 60 cents per share starting in the full year 2009.

They also have had tremoundous pricing leverage in the potash market as prices continue to spike in this field.

The company pays an annual dividend of $1.28 yielding 3.2 percent income which should increase at well above the inflation rate looking out the next 3-5 years.

The downside is they are weather dependent for the ice control sales but as they were created a few years back after coming back from a private equity deal they were highly leveraged and circumstances have come into their favor to reward the leverage in this case and they are using the circumstances wisely to deleverage their balance sheet which I really like.

I just purchased at $40.00 for one percent of my overall portfolio.

 

[kumquat]

I'd be a bit careful.

On the road salt front look at where it's produced, where it's used and who it's competitors are. Mine is in Ont. seems close to GTA and some US midwest areas. Expensive to [-]sell in [/-] ship to US NE. POT sells road salt to New England from New Brunswick and ships by water. Should road salt become expensive enough to pay for the shipping, POT, MOS and AGU have more than 300 million tons of the stuff sitting on tailings piles in Sask. $1/ton + shipping and handling and it's all yours. In Sask. it's toxic waste.

On the potash front, they don't even register. Google's profile says they produce speciality potash products but doesn't list a mine. I suspect they buy KCL from primary producers and produce sulphates or nitrates. The $ are in primary production. It's also possible they have a [-]small[/-] [-]tiny[/-] miniscule potash mine in the UK, someone does. Economical at today's prices but tommorrow? The big boys (POT, MOS, AGU, Uralkali, Belloruski, K & S, ICL, APC) own this market and the first 3 own 60% - 80% of it in the order they appear.

Dig deeper. Do your DD.


Please note that I follow potash closely as I own far too much POT. I don't know the road salt business at all.

 

[Running_Man]

The assumption that I have not fully looked into this stock is incorrect, I have been following for six months and should have bought sooner but didn't because of my negative outlook on the overall market. My sources for data in researching this stock included the USGS, NRCAN, The Compass Minerals S-1 and all their Edgar filings, the most recent quarterly earnings call and assorted SEC filings.

Compass in the third quarter had sales of 29.1 million dollars of potash specialty fertilizer which they produce in their solar facility in Utah. This was 21 percent of their total sales in the quarter but the operating margin of 27 percent lead to this being 47 percent of their operating earnings. The presently produce 75,000 tons of sulphate of potash annually in Utah and are in the midst of a plant expansion to increase that to 100,000 tons. They source out for their MOP and the expansion will either be used to either increase their production of SOP or replace the outsourcing of MOP depending on which looks the most economically viable.


As for their salt production they have 3 salt production facilities in North America in Lousiana producing 2.8 million tons in Kansas producing 450 thousand tons of evaporated salt for the consumer market, and 1.5 million tons at their solar plant in Ogden Utah. In Canada they have the worlds largest and low cost mine in Goodrich Ontario producing 6.5 million tons but they are in the middle of a plant expansion that will increase their capacity by 1.75 million tons by 2010 ( 7.25 in 2008 ). They also have evap plants in Nova Scotia and Saskatchewan which serves consumer needs for salt. In the UK they have a plant that produces 2 million tons per year for that market and also rents old mining areas underground as a document storage service.

The total capacity for salt production in North America is 80,350 tons much of which is sold as brine (salt in solution) and of low value which is not Compass's target market. Compass has production capacity of 11,720 which will be increasing by 1,750 in the next 3 years. It is not economically feasible to compete in a market by shipping it in against a local mine and where there is a smaller local competitor their pricing will almost always prevail, however in winter markets with heavy snow only the large suppliers can produce enough salt to capitalize on the increased demand. POT has only 650 thousand tons of salt production capability.

There are only 2 large competitors in Compass markets in North America: Cargill a privately held company (12,915 tons) and Morton Salt a division of Rohm and Haas chemicals (13,100 tons). In order to service a larger area shipment by barge up the river systems of the United States or great lakes shipments to stockpiles along the great lakes is the method employed.

As the recent snows will have depleted salt stockpiles Compass should be primed to provide additional supply at higher prices and because there would be less carry over inventory bidding for salt contracts should prove to be at higher prices in 2008. In the third quarter Compass had volume increase of 2 percent on highway deicing yet price increases of 5 percent and consumer pricing increased 15 percent. Forward quarters should have better trends than that. Additionally their sales in Canada are going to be aided by the strengthing of the Canadian dollar when converted for US financial. The company is not greatly effected by the economy and long term demands for road salt are determined by the amount of road mileage being added in their markets. For the most part this is 1-2 percent in annual growth of sales in their market over the inflation rate. Certainly not exciting but provides a strong backing for the dividend of the stock in the long term.

 

[clifp]

CMP has been pick on the M* Dividend pretty much since its inception. I bought it twice in the summer of 2005 for $23 and $24 and for dear old mom in 2006. I like it because my yield on cost is now 5.5% (obviously a 70% in stock price gain is nice also) due two dividend increase of 17%.

The exciting (well for a boring salt mine producer) news is they are seeing growth in their sulfate of potash and have hiked prices twice in the last few months. M* has CMP at a fair price of $50 and the newletter predicts annual dividend hikes in the 6-9% range.

I agree with you running man it is good defensive play because they are the lowest cost producer of salt, they have excellent access to great lake shipping and rising trucking and rail rates will make their cost advantage even more compelling.

 

[Running_Man]

Well Compass has announced earnings and most of the expectations I outlined above have occured. The stock is presently right at $49.35, so I actually have to think at what price would I sell and my normal mode for a steady dividend grower is to sell when the dividend falls to 2 percent, as I should be able to find faster dividend growth with other companies or higher dividends with other steady growers and with the increase to .335 per quarter this computes to a selling price of $67.00.

While still quite a ways away, the news on Compass will continue to be favorable for the year, all of their market segments (potash, salt, records management) will have favorable comparisons and the debt refinancing will also add during the year, but I would agree with Morningstar and feel it is appropriately priced at $50.00 with a forward yield of 2.7 percent as of right now, this no longer would be the time to buy this as a defensive play. However I will hold unless their operations encounters trouble or the price hits 67 in the coming year.

Now I need to pick my stock to buy for February real soon, I think I'll pick from the DJIA using the value line momentum/safety model I like to use to sort through stocks.

 

[FinanceDude]

In general I am very negative the market but I do believe that Compass Minerals (CMP) Price = $40.00 has various attributes that will aid it going forward to overperform the market while paying a good dividend.

Owner of the largest salt mine in North America I would expect their 4th quarter earnings to significantly exceed expectations as ice control salt usage should be very good with the December snowfalls so significantly. This will help the current year with additional sales but more importantly allow for rebuilding of inventory at higher prices as users scramble for salt. They have been investing in increasing their salt mining capabilities and are the low cost producer in this area. The reduction in inventories this winter should result in higher bid results for their ice control market in the winter of 2008-2009.

They are expected to call a total of 303 million in debt and reduce their interest rate from 12.9 percent to 7 percent which translates into an increase in EPS of about 60 cents per share starting in the full year 2009.

They also have had tremoundous pricing leverage in the potash market as prices continue to spike in this field.

The company pays an annual dividend of $1.28 yielding 3.2 percent income which should increase at well above the inflation rate looking out the next 3-5 years.

The downside is they are weather dependent for the ice control sales but as they were created a few years back after coming back from a private equity deal they were highly leveraged and circumstances have come into their favor to reward the leverage in this case and they are using the circumstances wisely to deleverage their balance sheet which I really like.

I just purchased at $40.00 for one percent of my overall portfolio.

Nice pick, it closed at $51.25 today, which means you made a quick 28%............

 

[clifp]

I was a disappointed at the dividend increase, a $.08 - .$10 share would have have been a more reasonable 6-8% increase. I'll be selling out of the money calls @55 or 60 when they get introduced next week. If they get excercised my total return will be over 150% for a 3 year investment, if not I'll be making a nice income stream from the options premium and dividends.

 

[FinanceDude]

I was a disappointed at the dividend increase, a $.08 - .$10 share would have have been a more reasonable 6-8% increase. I'll be selling out of the money calls @55 or 60 when they get introduced next week. If they get excercised my total return will be over 150% for a 3 year investment, if not I'll be making a nice income stream from the options premium and dividends.

Sounds like a plan. Wonder what the premiums will be.........

 

[Running_Man]

I was a disappointed at the dividend increase, a $.08 - .$10 share would have have been a more reasonable 6-8% increase. I'll be selling out of the money calls @55 or 60 when they get introduced next week. If they get excercised my total return will be over 150% for a 3 year investment, if not I'll be making a nice income stream from the options premium and dividends.

I believe they are holding on to their money due to the upcoming refinancing, they noted in their call there was an added premium in refinancing their debt. The next dividend increase announcement will be interesting. Management lost their usual restraint in the conference call, which I think resulted in the stock soaring so much. Hopefully management does not get confused and think they run a growth company. I am ok with the stock analysts thinking that though, they were really impressed with the powerpoint slides compass provided.

 

[clifp]

I didn't listen to the conference call this quarter. I did one time, God what a boring business, but boring is good. Paying down debt is a worthwhile activity. My greatest fear of leaving excess profits of a cash cow in the hands of management, is they will find a way to squander it in a new business.

 

[Running_Man]

Well 67 took less time than I thought with Compass today right now at 67+. I will maintain my position as long as this uptrend continues, their earnings will be spectacular but there are better investments for my taste than chasing a former dividend play which has become a growth stock. I will sell on a close below 65 for now and risk 3 percent of my position to see how much the market will be willing to pay.

Now if only I could get all my selections to rise 67 percent in 3 months! I did purchase Coke (KO) as 2 percent of my portfolio in March @ 58.60.

 

[clifp]

I sold some at 60 and the rest at 64. It hit 68 today so obviously I sold to soon. But I am with you this was strickly a dividend play that turn in a growth stock.
The M* Dividend investor has this on his list as to stock sell when he has something he'd rather buy, but right he is holding it. Right now I have plenty of losses to balance out the gain.

I promise I won't second guess myself for taking a 150% profit on a stock. So please DONT TELL ME if and when Compass hits a 100. I'll be pretty upset

 

[Running_Man]

Sold Compass at 67.12 today as it appears to be having difficulty maintaining the uptrend (I did give CMP an entire week to make a run). It was an interesting move

 

[Running_Man]

All of the reasons I liked Compass before at 40 are still valid. With the Potash growth scenario now in question the realization this is not a growth stock has hit with Compass's collapse today to 41 and is getting close to the 40 I originally paid. They paid off their 12 percent debt and so are deleveraging and with the increase in salt prices should have a very nice winter if mother nature cooperates. Lower debt and solid cash flow make this a solid dividend play, the potash fever was just fertilizer for the analysts, now it can go back to a dividend stock. In the current enviroment though I am looking for 34, 4 percent yield. With tax loss selling I may be able to get it.......

 

[clifp]

Interestingly enough the M* Dividend guy just today put it back on his buy list after selling it in the 70s.

His rational is pretty much unchanged great defensive stock solid dividend story, low cost producer. As he says the folks that owned it between 40 and 80 are different type of investor than you or I. Those "evil" momentum/technical folks.

We are on exactly at the same page, (ok I was look for $35 vs your $34 LOL). A year ago I'd have been happy to buy it at 40 but with so many other bargains. I'll wait until some hedge fund has to dump their salt price futures to deleverage their CDO squared.... Sadly, I am not sure I am being facitious when I say this.

 

[Running_Man]

OK a remarkable occurence has occured with the US dollar and it has fallen to 78 cents on the US dollar. This will reduce Compass's future earnings as they have a good percentage of sales in Canada. I am reducing my buy price to $27.20 to get a five percent yield to compensate for the rapid decline in the US dollar. If it continues to fall below $40 I am hoping the tax loss selling takes it to that point.

 

[clifp]

CMP is a fine company and fairly repriced, but compared to the other bargains out there hardly of great interest for me.