Heavy and Cheap Mean Valuable Moats
High shipping costs prevent low-priced imports from entering these companies' markets.
Although rock salt miner Compass Minerals (CMP) and aggregates producers Martin Marietta (MLM) and Vulcan Materials (VMC) sell different commodities, these three basic materials firms share an important characteristic. The commodities they produce have low value/weight ratios--rock salt generally sells for around $50 per ton and aggregates fetch only $10 per ton--so producers located closer to customers have a great cost advantage over far-flung competitors. As such, we've seen relatively small changes in prices for rock salt and aggregates despite some wild swings in demand. Along with some other favorable characteristics, we think the low value/weight ratio contributes to a wide economic moat for each company, and all three appear undervalued to us. Compass Minerals' near-term profits have been hurt by back-to-back low-snowfall winters, but earnings should grow long-term, assuming normal weather, as the company expands its specialty fertilizer production capacity. Both Martin Marietta and Vulcan Materials have suffered from a serious multiyear downturn in construction activity, but they've cut costs greatly and pricing should continue to be strong, giving both companies tremendous leverage to an expected upturn in demand.
Rock salt and aggregates prices stay relatively steady even when demand declines precipitously. While rock salt and aggregates are undifferentiated commodities, Compass Minerals’, Martin Marietta’s, and Vulcan Materials' prices haven't suffered as one would expect during periods of weak demand. As you can see in the data below, even when Compass' volumes suffered from low snowfall in 2006, 2009, and 2012, the company's average realized selling prices remained steady. And even when Martin Marietta and Vulcan suffered from a disastrous multiyear downturn in construction activity after 2005, prices remained relatively strong and actually ended much higher in 2012 than they had been in 2005, despite no drastic increase in cash costs.
Elizabeth Collins does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.