Compass Minerals Earnings: Salt Profits Should Grow in 2024 as Early Bid Strategy Proves Favorable
After updating our model to incorporate Compass Minerals’ CMP fiscal third-quarter results, we maintain our $65 per share fair value estimate. Our wide moat rating is also unchanged.
Compass shares were down roughly 7% at the time of writing. We think the market is reacting to news of the initial salt bid results (roughly 65% of total bids) where Compass should see a 3% price increase but for volumes to fall 5% in the upcoming winter season.
Given the mild 2022-23 winter, we are in favor of management’s price-over-volume bid strategy, which should allow Compass to maintain salt EBITDA per metric ton above $20 in 2024. Historically, following mild winters, salt prices have either declined or remained flat, as governments buy salt at the low end of contracted volume (80% of the bid volume), leaving producers with excess inventory to begin the next season. However, the price increase shows the benefits of Compass’ disciplined approach. This should drive growth in salt EBITDA in 2024.
Accordingly, we view the selloff as unwarranted. We view Compass shares as materially undervalued, with the stock trading in 5-star territory and roughly 45% below our fair value estimate.
Shares are also only slightly above our downside scenario, which produces a fair value estimate of $30 per share. In our downside scenario, we assume lower long-term salt volumes and profits as mild winters become more normal. Further, we assume Compass’ plant nutrition business generates materially lower profits due to lower fertilizer prices and volumes. Finally, we assume little long-term profit contribution from Compass’ new ventures into fire retardants and lithium. Accordingly, we think a lot of the bad news is priced into the stock, offering long-term investors a solid margin of safety.
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