Morningstar | Trimming Our Compass FVE to $81 as Management Slashes 2018 Guidance on Lower Salt Production
In a preliminary update before the company's third-quarter earnings release on Oct. 31, Compass Minerals reported lower-than-expected third-quarter salt segment production and reduced full-year 2018 EPS guidance to $2.20-$2.50 from $2.75-$3.25. Accordingly, we've updated our valuation model to reflect lower salt segment sales and higher unit costs for the remainder of 2018 and into 2019. We now forecast 2018 and 2019 adjusted EPS to be $2.29 and $3.69, respectively, down from our previous forecasts of $2.85 and $4.46. As a result, w e've lowered our fair value estimate to $81 per share from $83 for wide-moat Compass Minerals. The market reacted harshly to the news, sending shares down roughly 17% at the time of writing.The lower production outlook comes from a slower-than-anticipated ramp-up of Compass' continuous miners that will decrease unit production costs once fully running. The longer ramp-up time likely stems, in part, from the Goderich mine labor strike that went from late April to mid-July. The continuous miners had been installed just before the strike began. As a result, workers had to be retrained to operate them during the time of year when Compass typically produces the most salt.
While this latest setback represents yet another operational hiccup that has weighed on Compass' results and share prices over the last 13 months, our long-term outlook is unchanged. We are confident that Compass will ultimately achieve meaningful cost reductions at its low-cost Goderich mine due to the company's cost-savings plan (which includes the continuous miners). Further, higher deicing salt prices in the upcoming winter should still provide a boost to Compass' earnings. For those with a longer investment horizon, we view the temporary setback as an attractive entry point for an undervalued, wide-moat business.
For more information on our long-term Compass Minerals outlook, see our April report, "Fleeting Headwinds Provide Attractive Entry Point for Compass."
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.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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