EUR 850.00 For Business Accounts Only

Morningstar | Maintaining $81 FVE as Compass Remains on Track for Full Goderich Recovery; Shares Undervalued

Compass Minerals reported decent first-quarter results, as operating earnings grew 25% year on year to $33 million. Higher profits were driven by lower salt unit production costs and higher salt prices, partially offset by weak results in the fertilizer business. In the earnings release, management raised its full-year guidance for salt sales volumes by 500,000 tons to a range of 10.5 million to 11 million tons because of greater-than-expected first-quarter salt production. However, management also lowered full-year guidance for plant nutrition North America sales volumes, as bad weather to start the year shortened the planting season. While Compass should be able to make up most of the forgone volumes in the second quarter, we have slightly lowered our outlook for 2019. We now forecast PNNA volumes to be roughly flat year on year.

Having updated our model to reflect these changes, we maintain our $81 per share fair value estimate for Compass Minerals. Our wide moat rating remains intact. At current prices, shares remain undervalued, as we expect a full production recovery at Goderich to drive higher salt profits in 2020.

Salt segment operating earnings grew 53% year on year to $52 million during the quarter despite a 14% decline in total salt volumes. The gain was due to a 630-basis-point operating margin expansion to 17.1% as a result of higher prices and slightly lower unit production costs. In the earnings release, management said that production at the low-cost Goderich salt mine has performed well since it restarted after the annual March maintenance shutdown. We continue to forecast that a full production recovery at Goderich will result in higher volumes and lower unit production costs, as we see unit production costs falling over 10% in 2020 versus 2019.

In its earning release, management said it expects favorable market dynamics in the upcoming North American highway deicing salt bid season, which typically runs from April to September and will set prices for October 2019 through September 2020. We share management's view and expect Compass to be able to raise prices during the bid season.

Deicing salt prices generally rise following winters with above average snowfall, as companies carry less inventory and can submit bids that reflect the marginal cost of production in a given region. However, deicing salt prices typically fall following winters with below average snowfall, as deicing salt producers carry more inventory and will reduce prices to increase volumes. The 2018-19 winter saw above average snowfall. As a result, we expect Compass will benefit from higher prices.

For more information on our outlook for Compass Minerals, winter weather, and deicing salt prices, see our April 25 report "Compass Minerals' Rally Isn't Over; We Still See 40% Upside."