-Compass Minerals is a large producer of salt and specialty fertilizer.
-Sales growth over the past five years has averaged 8% annually.
-Over this period, earnings growth has averaged 28% while cash flow growth has averaged 4%.
-The dividend yield is 2%, with a five-year dividend growth rate of 7%.
-The company has a lot of debt, but a high interest coverage ratio.
-Overall, with a P/E ratio of over 16 I think it’s a bit on the expensive side, but still reasonably attractive.
Compass Minerals (NYSE: CMP) produces and sells salt and specialty fertilizers to countries around the world, although a large chunk of the sales occur in the US, Canada, and the UK. Deicing salt is mostly sold in the Great Lakes and Mid West regions of the US, and in the UK. Consumer and industrial salt is sold throughout the US and Canada. Specialty fertilizers are sold in western and southern US, and in Latin America, Japan, Australia, and New Zealand. Uses for salt include highway deicing, residential deicing, water conditioning, nutrition, dust control, and food preparation. The company has nearly 1,800 employees and a market capitalization of approximately $2.5 billion.
Highway Deicing: 47%
Consumer and Industrial: 39%
Specialty Potash Fertilizer: 13%
Records Management: 1%
Compass Minerals is the parent company of six businesses:
North American Salt Company
Provides diversified salt products to customers throughout the United States.
Provides diversified salt products to customers throughout Canada.
Salt Union Ltd.
Provider of rock salt to customers throughout Britain to keep roads safe.
Great Salt Lake Minerals Corporation
Largest producer of sulfate of potash in North America.
Pristiva focuses on selling products to the salt water pool industry.
Deepstore Records Management
Deepstore is an interesting innovation of the company. Deepstore offers long-term document storage services in its old Winsford, England salt mine. In empty portions of their mine, the temperature and humidity is constant and free of pests, and so the company offers low-cost storage services.
Sales, Earnings, Cash Flow, and Margin
Over this five-year time period, Compass Minerals has grown sales by over 8% annually, on average.
Compass Minerals has managed to grow company-wide earnings by approximately 28% annually, on average, over this five year period. This is not a particularly realistic/useful growth number.
Year 2009 saw significantly decreased sales and yet modestly increased earnings. The answer to this interesting mix lies in the cash flow statement.
Operating Cash Flow Growth
There’s the answer to what happened in 2009. The cash flow tells a lot more than earnings. A look into the cash flow statement for 2009 shows that inventories increased by $147 million.
So what happened was that in 2009, Compass sold a lot less salt and fertilizer than they produced, but still counted the material they produced but did not sell as profit because it increased their inventory. Companies do this all the time, but with this sort of company it’s particularly dramatic.
Over this five-year period, Compass grew its cash flow from operations by an average of less than 4% annually.
As one would expect from these numbers, the quarterly reports thus far into 2010 show reduced earnings and increased cash flows as the company sells off its inventories.
The real growth rate of this company lies somewhere in between the extremes of the earnings and cash flow growth. This five year period began with a strong year (high cash flow) and ended with a weak year (high earnings but low cash flow). Shifting the reporting period around changes financial calculations dramatically. The revenue growth rate seems to be an appropriately conservative metric for estimating the growth of this company.
Compass Minerals has a net profit margin of 15%. Return on Equity (ROE) is over 70%, and this is largely due to the leveraged position that Compass has.
Compass Minerals currently has a dividend yield of 2% with a payout ratio of approximately 30%.
Compass Minerals has grown its dividend by an average of 7% annually over the past five years. The most recent increase, from 2009 to 2010, was nearly 10%.
Compass Minerals does not have a particularly strong balance sheet with a total Debt/Equity ratio of over 1.8. The interest coverage ratio, however, is fairly strong at over 10. Compass Minerals is leveraged yet quite safe in terms of debt.
The debt is currently being reduced. The company had over $600 million in long-term debt in 2007 and as of the most recent quarter of 2010, has $485 million in long-term debt.
Goderich Mine in Ontario, Canada is the largest underground rock salt mine in the world. Its current production capacity is 7.5 million tons and is being expanded to 9 million tons. The company also owns salt mines in Louisiana and the UK. Their mine in Winsford, England is the largest salt mine in that country. These enormous salt mines give Compass Minerals a competitive cost advantage in their markets. It is estimated that they still have several decades worth of salt mining available.
The company also operates mechanical evaporation sites to produce salt for industrial, agricultural, and commercial use. In addition, solar evaporation is used on the Great Salt Lake in Utah to produce sulfate of potash, magnesium chloride, and salt. Their solar evaporation facility is the largest solar salt production site in the US.
Salt producers submit blind bids to governments and other salt end-users, and the lowest bid typically wins. A significant part of the price of salt is the transportation cost, because salt is so cheap per unit of weight. Compass has access to water transportation over the Great Lakes, Mississippi River, and Ohio River, and their other facilities are close to rail networks, and so their transportation costs are low. The combination of having the largest production facilities in their markets, and efficient transportation locations, gives Compass Minerals a significant economic advantage.
Volume sales for salt and specialty fertilizer have been erratic, but pricing has been on a rising trend for both.
Sulfate of potash is used on high-yield crops, and carries a larger profit margin than commodity potash fertilizers. Compass Minerals is the largest producer of sulfate of potash in the United States. Growing populations and diminishing arable land is a combination that favors the potash industry.
A principle risk to Compass Minerals is the weather. A huge portion of business is dependent on cold, snowy winters that require a lot of salt on the highways. It’s also dependent on the seasonality and financial strength of its fertilizer buyers. In addition, Compass leases some of its locations, so it’s dependent on the availability of reasonable leasing conditions. The company also faces currency risk and is reliant on reasonable energy prices for its operations.
Conclusion and Valuation
In conclusion, I think Compass Minerals would make for a respectable diversified investment, but I’d like to see the price a bit lower. The P/E ratio of 16 is a bit higher than I’d like to pay, especially considering the high (but diminishing) debt levels.
Most portfolios consist of companies that face considerable economic risk, so CMP represents an interesting opportunity to cushion a portfolio from economic risk in return for taking on some weather-related risk. Salt is fairly resistant to economic issues while their smaller sulfate of potash segment is heavily affected by them. The dividend is moderately small but growing, and the payout ratio is low.
Full Disclosure: I do not have any position in CMP at the time of this writing.
You can see my full list of individual holdings here.
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