An Unwarranted Sell-Off for Wide-Moat Compass Minerals

Seth Goldstein: Wide-moat Compass Minerals shares have fallen roughly 10% since the company issued profit guidance below expectations as a part of its fourth-quarter earnings release. Investors are concerned that the operational issues facing Compass might represent a new normal for the company's earnings power.

We view a sell-off of this magnitude as unwarranted and believe the adverse news flow has created an attractive entry point for a high-quality, wide-moat stock. We continue to see near-term catalysts that will aid Compass' profits, which should drive share prices higher.

First, our thesis that winter weather has historically exhibited mean reversion tendencies remains intact. The 2017-2018 U.S. winter saw increased snowfall relative to the past two winters. Historically, harsher winters have led to increased deicing salt prices as local governments need to replenish inventories. Higher salt prices should drive profit growth for Compass in the second half of 2018 and into 2019.

Second, Compass Minerals is navigating operational issues at its cost-advantaged Goderich rock salt mine, the crown jewel of its asset base. However, we expect the company to fully restore normal operations at the Goderich mine and resume the mining of lower-cost salt in the second half of 2018.

At its current share price, Compass Minerals is trading in 4-star territory, representing attractive risk-adjusted return potential relative to our $82 per share fair value estimate.