2023-05-26 12:58:52 ET
Summary
- Compass Minerals International Inc might have increased its operating margins by 140% YoY, but still has a negative bottom line.
- I think the demand will be steady for CMP over the coming years, but warmer winters seem to present a challenge for the company's salt segment.
- Shares have been diluted over the years and I find the valuation to present way too much risk here to make an investment, CMP is a hold for me.
Investment Summary
Compass Minerals International Inc ( CMP ) is a leading provider of essential minerals and specialty products, operating in two main segments: Salt and Plant Nutrition. In the Salt segment, the company manufactures and distributes salt products for various applications, including road deicing, consumer deicing, and industrial uses. The Plant Nutrition segment focuses on offering specialty fertilizers, plant nutrients, and related products to improve crop yield and quality.
The company still has a negative bottom line, as shown in the last report, where the net loss was $21 million for the quarter. The future estimates for the company are very positive, however, with EPS expected to reach $1.67 in 2025. That would be a massive increase from now until then that would put CMP at a reasonable valuation of 20x earnings. The market for salt seems to be on a steady uptrend, as it's an essential part of our society and necessary to preserve food. But I don't expect there to be any catalyst in the market, catalysts for CMP would come from within the company, like an impressive increase in margins for example. Even though the market very likely will provide CMP with continued revenues, I don't think it's a strong enough buy right now, especially when they don't have a positive bottom line yet. That presents too much uncertainty to a portfolio, something I rather try and avoid instead. I will be rating the company a hold.
Market Outlook
As mentioned, the market for salt is very likely to continue growing, as it's an essential part of our society. Looking at a report from persistencemarketresearch they estimate the salt market to grow around 3.5% CAGR between now and 2032. Not quite explosive growth, but the reliance we have on salt should be enough to help mitigate any downturn in the market.
Looking at CMP, they generate a majority of their revenues from salt, and looking at the last earnings report, the company experienced significant growth here in terms of operating earnings. It increases by 48% YoY as a result of higher average sales prices. Where there is some worry about the salt industry, or the part that CMP serves, is that they are very weather dependent. If we continue to have warmer winters the need for salting roads lessen and that was seen here. Highway deicing sales were down 19% YoY. This does make the future come into question, as I think this report highlights that perhaps they are higher than they should be. We are experiencing global warming, and the way that affects the need for salting roads going forward remains to be seen. I find however that CMP might need to lean into other parts of the salt industry to continue growing sales. If they are unable to do so, I see a scenario where they continue having disappointing earnings reports and a drop in the share price should follow.
Financials
Looking at the financial state of CMP, they have managed to at least increase the cash position a fair bit since September 2022. Going from under $50 million to around $250 million is solid growth and puts the company in a much better position to make essential investments. The company has also been diluting the investors as well, by $40 million. Not a warning sign just yet, in my opinion.
Moving over to the debts, though, the company holds a substantial $825 million of it in long-term debts. The net cash from operations didn't see that large of a fall, thankfully, and came in at $143 million for the last 6 months, just a $2 million decline. This amount of net cash should help keep the long-term debts at bay and in my view is a major reason for the company not diluting shares faster than they have over the years. It should be said though that I fully expect share dilution to continue as long as the net margins remain negative.
In conclusion, regarding the balance sheet, I think that CMP is in a decent position right now. The cash flows seem to be sufficient to pay off any current liabilities that come up. Improvements that would be nice to see in the coming reports are an even stronger cash position. Being able to pay half your long-term debts at least would put the company in a very strong position, as right now the negative margins aren't doing them any favors.
Risks
I think the most prominent risk about investing in CMP right now is the valuation of the company. Given that the bottom line was negative in the last report, CMP isn't really trading based on fundamentals in my opinion, but instead on future projections. This perhaps can be said about all companies, but CMP lacks the track record of growing profitability to justify the current price in my view.
Without fundamentals to fall back on, it opens up a lot of risk for investors, a risk that I would rather avoid. The company might have strong estimates right now about its future performance, but I think it's wiser to start a position in such a company when there is actual proof of concept. Otherwise, I think you are better off keeping money in an index fund or a value company with a buyback program and decent dividend.
Valuation & Wrap Up
As mentioned, the valuation of CMP right now is unsupported, as it's lacking a positive bottom line. I think there are wiser investments one could make if they want to gain exposure to the materials sector. Looking at mining companies going after lithium or copper might be both safer and more reliable investments. They might be cyclical but have the added benefit of keeping strong balance sheets to both support buybacks but also potential projects. Apart from that, there isn't really a clear moat with CMP, as they are controlled by the prices the market sets and the demand for their product.
Noting a comment from the CEO Kevin S. Crutchfield, “We will continue to work diligently on the parts of our business that we can control in order to maximize our value creation for all stakeholders”. I don't think they have been very successful in this. The management has been diluting shares over the years and the share price itself has reflected these moves. Investors from 10 years ago would have lost 61% of their investment, not counting the dilution too. That is devasting, and I don't think CMP has justified itself as a buy right now. I see the cracks in the business and the failure to provide investors with value, and will be rating it a hold.
For further details see:
Compass Minerals: I Don't See Investors Getting Any Value Here