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A Wide-Moat Firm Trading at a Meaningful Discount

Seth Goldstein, CFA

Seth Goldstein: Wide-moat companies rarely trade at a meaningful discount and with near-term valuation catalysts, but Compass Minerals is one such opportunity.

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

Compass shares remain undervalued, as investors are concerned that the recent operational issues represent a new normal. However, operations are improving at Goderich. We expect production to be fully restored by the end of 2019 and forecast unit costs to decline beginning in 2020.

Further, the most recent winter saw an above-average number of snow days. Historically, Compass Minerals has been able to raise prices following harsh winters, as demand for salt rises while producer inventories are low. As a result, we expect higher salt prices next winter.

Lower unit production costs combined with higher salt prices should drive a rebound in profits as soon as next year. At current prices, we see significant upside for wide-moat Compass Minerals, with shares trading at more than a 30% discount to our $81 per share fair value estimate.