Undervalued Compass Minerals Can Overcome Challenges

Seth Goldstein: At Morningstar, we are always excited to highlight wide-moat, undervalued names, and Compass Minerals is one such opportunity.

Compass Minerals' wide moat comes from its low-cost salt production at the Goderich mine in Ontario. The mine's unique geology includes 100-foot thick seams, which are 3 to 4 times the size of most other salt mines. This allows Compass to mine its salt at a lower cost than its competitors, a dynamic that will persist many years into the future.

Further, the mine is located on the Great Lakes, which benefits Compass from a geographical perspective. Salt has a low value to weight ratio, which makes transportation costs a significant portion of total costs. Because Compass can readily ship its salt by water part of the way, the company has significantly lower transportation costs versus inland competitors that rely on rail or truck.

Compass shares remain undervalued, as investors are concerned that recent operational issues might represent a new normal for the company's earnings power. The Goderich mine has suffered various operational hiccups, including a slower than expected production volume ramp-up using the company's new low-cost continuous mining equipment.

Additionally, Compass recently announced the departure of CEO Fran Malecha. However, we believe these challenges will prove fleeting, with improved profitability still in store in 2019 and beyond.

Accordingly, our long-term thesis is intact. With no geological issues affecting salt production at Goderich, we ultimately expect a rebound in Compass' profits as the mine is fully restored and the company's cost-reduction plan comes to fruition.

At current prices, we see significant upside at our $81 per share fair value estimate for wide-moat Compass Minerals.