Everyone needs salt (Compass Minerals).

August 23, 2009
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I was on vacation last week, but I’m back and I brought Compass Minerals (CMP) with me.

salt pileCompass Minerals operates a number of salt mines, and sells rock salt for road de-icing and more refined salt for industrial purposes and consumption by humans and animals. They also produce potash fertilizers. Compass claims to be one of the lowest cost salt providers in the nation, and in the last three years has produced excellent earnings growth, although last year’s high earnings may have something to do with the high price of salt last year.

Their PE ratio is 9 ½, which to me implies that the recent growth they have experienced is not built into the share price. However, it does assume that the recent growth is here to stay. This is a bold assumption since rock salt purchases will be constrained by lowered municipal budgets and fertilizer purchases by diminished demand, but when the economy returns to normalcy as it most likely will eventually, Compass will remain a low-cost provider in an excellent competitive position. They also claim to be diversifying into consumer and industrial salt. Between 2006 when they shipped 8000 tons of salt, and 2008 when they shipped 12000 tons, their cost of production increased from $180 million to $318 million, making a ratio of 1.5:1 for volume and 1.77:1 for costs. This suggests that most of their costs are incremental, which seems to me to be a good thing for a mining company.

They have also been deleveraging their balance sheet, which is most likely a good idea in this environment. On paper, they have $836 million in assets and $692 million in debt, and in prior years their debt has exceeded their asset value. However, this $836 million in assets produced $274 million in operating income and $144 million in 2007 (compare Rayonier, which produced $223 million in operating income based on $2 billion in assets), so there is an argument that Compass’ book value understates the productive capacity of its holdings (or perhaps Rayonier’s is overstated). Certainly the market thinks so; Compass’ market cap is $1.7 billion against $144 million in book equity.

Compass’ capital expenditures have recently exceeded depreciation charges, but they are well covered by operating cash flow. However, apart from last year’s excellent results, operating cash flows  less capital expenditures have covered dividends less than twice, even with Compass’ modest dividend, currently yielding 2.7%. But, if they can keep their current position in the market (on their last 10-K they estimated that the areas they service consume 21 million tons of salt in a year, of which they sold 12 million tons last year), their pricing advantage should carry them through.

At any rate, Compass is a well-positioned company at a reasonable price, and salt is cheap and useful enough not to have many replacements, so Compass Minerals is definitely worth considering.

2 Responses to “Everyone needs salt (Compass Minerals).”

  1. Where did you get your blog layout from? I’d like to get one like it for my blog.

  2. I use wordpress, and it has a set of appearance templates.

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