Morningstar | Maintaining $81 FVE as Wide-Moat Compass Minerals' Profits on Track for Recovery; Shares Undervalued. See Updated Analyst Note from 13 Feb 2019
Compass Minerals issued a 2019 adjusted EBITDA guidance range of $310 to $350 million, which was slightly below our expectations due to lower deicing salt volumes to start the year. Even so, we forecast EBITDA to grow nearly 20% year on year as Compass benefits from higher salt prices and greater fertilizer volumes.Our key takeaway from management's commentary on the earnings call was the expectation that the salt segment would be generating EBITDA margins of at least 30% beginning in 2020, which is in line with our long-term expectations. With our long-term outlook intact, we maintain our $81 per share fair value estimate for Compass Minerals. Our wide-moat rating also remains unchanged.
In the salt segment, the Goderich mine continues to ramp up production as management noted that January was the best production month since the continuous miners were fully implemented throughout the mine. However, we forecast that Compass will sell roughly 10.5 million fewer tons of salt in 2019. This is around 2 million tons below our long-term average forecast, as the company greatly reduced its deicing salt bid volumes for the current winter due to the production issues that have plagued Goderich over the last year.
We point to increasing production at Goderich as signs that Compass will be able to fully ramp up the mine over the next year, which will allow Compass to produce its typical volume amount starting in the 2019-20 winter. As a result, we forecast that salt EBITDA margins will expand around 1,000 basis points from a 10-year low of 20% in 2018 to roughly 30% in 2020, assuming typical winter conditions.
We view Compass as undervalued, with shares trading firmly in 4-star territory. At current prices, we see over 50% upside to our $81 per share fair value estimate. We point to the full production restoration of the Goderich mine over 2019 as a near-term catalyst that could boost Compass' share price as the market incorporates higher future profits.
Compass Minerals International is a holding company. Through its wholly owned subsidiaries, the company is a provider of minerals, including salt, secondary nutrients and micronutrients, and specialty chemicals. The company has three reportable segments: Salt, which produces, markets and sells salt and magnesium chloride and sodium chloride; Plant Nutrition North America, which includes sales of sulfate of potash specialty fertilizer and specialty plant nutrients; and Plant Nutrition South America, which manufactures, distributes and markets an array of specialty plant nutrients and supplements developed and formulated from primary and secondary nutrients, specialty plant nutrients and biostimulants.
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