Stock Strategist

Compass Minerals' Headwinds Bring Opportunity

Seth Goldstein, CFA

 Compass Minerals(CMP) share price dropped after the company lowered its profit outlook as part of its fourth-quarter earnings release. Investors were concerned that the operational issues facing Compass might represent a new normal for the company’s earnings power. However, we see an attractive entry point for a high-quality, wide-moat stock. We continue to see near-term catalysts that will aid Compass’ profits, driving the share price higher from current levels near an eight-year low. The 2017-18 U.S. winter saw increased snowfall relative to recent years. Historically, harsher winters have led to increased deicing salt prices as local governments need to replenish inventories. This should provide a much-needed profit boost for Compass’ deicing salt business. Additionally, the resolution of operational hiccups at the company’s cost-advantaged Goderich rock salt mine and subsequent cost-saving program should drive shares higher from their 18% discount to our $82 fair value estimate.

Harsh 2017-18 Winter Reflects Mean-Reverting Nature of Snowfall Levels
The 2017-18 winter, which we define as the fourth quarter of 2017 and the first quarter of 2018, saw 159 snow days in the 10 cities that drive the majority of Compass’ deicing salt volume. This is roughly 8% above the long-term average of 147 days and 54% above the 103 days in the winter of 2016-17. In our September 2017 Stock Strategist, we outlined our thesis that winter weather has historically exhibited mean-reversion tendencies. Regardless, Compass’ shares tend to sell off during mild winters. We’d characterize this market reaction as short-sighted, reflecting a recency bias that can provide patient, long-term investors with an attractive entry point.

Seth Goldstein, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.

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