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Equity Bottom-Up

Compass Minerals International, Inc / Equity Bottom-Up

Compass Minerals International, Inc (CMP US)

<div class="content-highlight"><h2>Production increases at Goderich and higher contract prices will drive profit growth for the wide-moat firm</h2></div><p>Since touching an 11-year low below $40 per share in late 2018, shares of wide-moat <a href="https://www.smartkarma.com/entities/19917" target="_blank" data-smartkarma-citation="entities:19917:1">Compass Minerals International, Inc (CMP US)</a> have rallied more than 40%. The market seems to be warming to the notion that harsh winter weather in January and February will boost deicing salt prices in the upcoming bid season. However, current share prices still reflect a wait-and-see attitude from investors regarding the resolution of recent operational headwinds at the company's flagship Goderich rock salt mine. We are more optimistic, as we anticipate that Goderich production will be fully restored by the end of 2019, in turn driving lower unit costs. An improved cost structure combined with higher prices should drive material margin expansion for Compass. Our 17% companywide midcycle operating margin forecast represents a significant improvement from only 9% in 2018. At current share prices, we see roughly 40% upside for Compass relative to our $81 per share fair value estimate.</p><hr><h2>Key Takeaways</h2><ul>
<li>The 2018-19 winter saw above average snowfall for the second consecutive winter. Over the next decade, we think average snowfall will look similar to the trailing 20-year average, despite year-to-year volatility.</li>
<li>Deicing salt prices should rise for the second straight year. Prices tend to reflect recent snowfall levels, and harsh winters typically lead to price increases in the following deicing salt bid season.</li>
<li>Compass Minerals continues to navigate operational headwinds at its low-cost Goderich mine, the crown jewel of its asset base. However, we see light at the end of the tunnel.</li>
<li>We expect Compass to hit normal monthly production targets by the end of 2019. In turn, production costs will decline more than 10% year on year in 2020.</li>
<li>We contend that Compass' micronutrient business is somewhat underappreciated by the market. We expect micronutrient fertilizer demand growth to outpace that of primary fertilizers.</li>
</ul>

Production increases at Goderich and higher contract prices will drive profit growth for the wide-moat firmSince touching an 11-year low below $40 per share in late 2018, shares of wide-moat Compass Minerals International, Inc (CMP US) have rallied more than 40%. The market seems to be warming to the notion that harsh winter weather in January and February will boost deicing salt prices in the upcoming bid season. However, current share prices still reflect a wait-and-see attitude from investors regarding the resolution of recent operational headwinds at the company's flagship Goderich rock salt mine. We are more optimistic, as we anticipate that Goderich production will be fully restored by the end of 2019, in turn driving lower unit costs. An improved cost structure combined with higher prices should drive material margin expansion for Compass. Our 17% companywide midcycle operating margin forecast represents a significant improvement from only 9% in 2018. At current share prices, we see roughly 40% upside for Compass relative to our $81 per share fair value estimate.Key Takeaways
The 2018-19 winter saw above average snowfall for the second consecutive winter. Over the next decade, we think average snowfall will look similar to the trailing 20-year average, despite year-to-year volatility.
Deicing salt prices should rise for the second straight year. Prices tend to reflect recent snowfall levels, and harsh winters typically lead to price increases in the following deicing salt bid season.
Compass Minerals continues to navigate operational headwinds at its low-cost Goderich mine, the crown jewel of its asset base. However, we see light at the end of the tunnel.
We expect Compass to hit normal monthly production targets by the end of 2019. In turn, production costs will decline more than 10% year on year in 2020.
We contend that Compass' micronutrient business is somewhat underappreciated by the market. We expect micronutrient fertilizer demand growth to outpace that of primary fertilizers.


Compass Minerals' Rally Isn't Over; We Still See 40% Upside