Compass Minerals Still On Course

By Stephen D. Simpson, CFA | November 05, 2008 AAA

Spare a moment of pity for those once-booming commodity metal players. The declining price of copper, iron and aluminum has wreaked havoc with the stock prices of producers like Freeport-McMoran (NYSE:FCX) and Chalco (NYSE:ACH), as well as more diversified miners like Rio Tinto (NYSE:RTP) and Anglo American (Nasdaq:AAUK).

On the other side of the ledger is Kansas-based Compass Minerals (NYSE:CMP), a commodity player whose stock is up more than 54% over the last 12 months, as of November 3, 2008. Better still, there's nary a word in management's guidance about any serious near-term pricing pressure and it looks as though this company should be poised to continue to deliver solid free cash flow generation.

Of course, that all comes with something of a catch. Compass Minerals produces salt. When other commodity prices are diving back down from their highs, the dependable demand and price dynamics of salt are reassuring and appealing. On the flip side, when commodity prices are soaring, the dependable demand and price dynamics of salt are boring and incapable of making investors' imaginations dance with the promise of windfall profits. (To read how investor psychology influences the market, see Taking A Chance On Behavioral Finance.)

Volume and Price a Winning Combo
Compass Minerals had a solid quarter this time out, leaving the consensus analyst estimate in the dust and the strong results lead analysts to jack up estimates for the third time in three months for 2008 and 2009.

Gross revenue rose about 70%, with volume fueling 40% growth and pricing making up the difference. Salt sales, which make up about two-thirds of the revenue base, jumped 50% this quarter, while the specialty fertilizer segment saw revenue that was more than 150% higher than the year-ago level.

Leveraging its Strength
Compass management has not been shy lately in pressing their advantage of being the No. 2 player in salt (Cargill is the largest, and Rohm & Haas (NYSE:ROH) is also a sizable player). If you look at the company's recent history of press releases, you see numerous announcements of product price increases. While there's certainly an eventual limit to how far Compass can push pricing (particularly in the large municipal highway salt markets, where there's a bidding process), salt demand is pretty inelastic and there aren't often many obvious alternatives.

Fertilizer - The Secret to the Story
Compass Minerals is probably going to continue to be known as a salt company for the near future, but fertilizer is a huge part of the equation here. The company sells sulfate of potash, a valuable premium alternative to regular potash that is used for certain chloride-sensitive crops like tobacco, fruits, vegetables and nuts.

For this quarter, segment operating earnings in fertilizer were nearly double that of the salt business, and the company is looking for a further one-third price increase in sulfate of potash pricing in the fourth quarter (which should largely drop to the bottom line). That's a marked contrast to some of the concerns about regular potash producers like Potash Corporation of Saskatchewan (NYSE:POT) and Mosaic (NYSE:MOS), and I would expect Compass Minerals to continue to leverage its position as the largest North American supplier of this valuable fertilizer. (For more about margin analysis, check out The Bottom Line On Margins.)

The Bottom Line
As you might expect from a stock that is up more than 54% over the past year, Compass Minerals doesn't present as a tremendous bargain. It is, in my opinion, a very well-run and dependable company, and a stock that could probably merit a slot in a long-term buy-and-hold portfolio. So, I wouldn't dissuade anybody from considering purchasing these shares today, but more opportunistic investors may want to wait for the inevitable time when the other commodity stocks start roaring again and investors once again see Compass as "boring" instead of "dependable".

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