We're trimming our fair value estimate for the wide-moat company following a cut to our near-term cash flow forecast.
By Jeffrey Stafford, CFA | 04-05-17 | 09:40 AM | Email Article

Snow has been scarce in  Compass Minerals' major Midwest markets this year. As an example, Chicago recorded no snow on the ground in January and February for the first time in 146 years. Compass' large and low-cost Goderich salt mine in Ontario serves much of the Midwest with salt through the Great Lakes waterways. We think the 2017 EPS guidance the company communicated in early February is likely to prove optimistic, and we've moved our 2017 EPS estimate to roughly 20% below the low end of management's guidance of $3.20-$3.70 per share. Not only will salt volumes likely come in below average in the first quarter, but near-term pricing will likely see some pressure during the important summer bid season.

Jeffrey Stafford, CFA, is director of energy and utilities research for Morningstar.

As one might expect, Compass' stock price has reacted unfavorably to the lack of snow. The stock is down more than 15% since the end of January. But we take a long-term perspective and view this move as an overreaction. We think Compass is well positioned for an eventual return to more normal winter conditions. As such, our long-term expectations for the company remain largely intact. We think the company's cost improvements at Goderich, which will wrap up this year, will shine through even further once the salt business gets back to a more normal operating environment. And eventually, more snowfall should also firm up salt pricing. We think patient investors who are wiling to wait on more normal snowfall will be rewarded, but predicting exactly when that payoff will come is harder to predict.

We're trimming our fair value estimate for Compass Minerals to $88 per share from $91 following a cut to our near-term cash flow forecast. Our wide moat rating for the company, based on cost advantage, is intact.

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