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Island Investing

Riffs, rants, and the upside of investing from way off Wall Street


In Good Company on Compass

Below are some recent comments from Meryl Witmer of Eagle Capital Partners on Compass Minerals (CMP), which we also own in the Tarpon Folio. Meryl was speaking as a panelist on the annual Barron’s Roundtable (sub. required).

Witmer: My first pick is Compass Minerals [CMP], which trades at 72 a share. It has 33 million shares and debt of $500 million. Recently volatile results in potash have obscured the long-term positive trends in its salt and potash operations. Compass owns perhaps the best rock-salt mine in the world, in Ontario, next to Lake Huron. The reserves are huge, and unlike most salt mines, capacity can be increased easily due to the width of the salt seam. Compass expanded this mine from 2.5 million tons in the 1980s to seven million tons, and it is expanding it to nine million tons. Transportation is cheap and easy over the Great Lakes, to the snowbelt states.

Compass also owns mines in Louisiana and the U.K, and evaporation facilities in the U.S. and Canada to produce consumer and industrial salts. These are used in food processing, water softening, chemicals and agriculture. Compass has the leading consumer-salt brand in Canada, Sifto.

Barron’s: Is the salt market growing?

Witmer: Volume usage grows just 1% to 2% a year, and pricing grows about 3% a year. But Compass’ revenue has grown 11% a year, and its profit 14%, since 2003. That is because the company has one of the only easily expandable mines, and captures most of the growth in the rock-salt market. The salt industry has consolidated, with just a few players selling a product that is economic to sell only to a limited geographic area.

Compass also produces sulfate of potash, or SOP. It is a specialty fertilizer that typically sells at a premium of $150 to $200 a ton to commodity potash. This potash is used to grow green vegetables, avocados, pecan and citrus trees, potatoes and other specialty crops, which account for 4% of harvested acreage in the U.S. but 40% of crop value. It isn’t used on commodity crops such as corn, soybeans and wheat. Compass produces about half its potash at the Great Salt Lake, using solar and wind evaporation. It is expanding its evaporation ponds, and has leases on virtually all the commercially viable SOP production areas of the lake. It also has a nascent document-storage business in the U.K., with virtually unlimited storage capacity in an old salt mine. That could become a very valuable business in its own right.

Barron’s: Tell us about earnings.

Witmer: There is some variability due to the weather and potash pricing. Compass should earn about $5.20 a share for 2009 and $6 this year. The company has earnings power of $8 to $9 in 2011 or 2012. The stock sells for about 72. My earnings estimates reflect capacity additions, normalizing potash volumes and small price increases in salt. Every 10% increase in the price of salt yields $2 more in earnings.

MacAllaster (another panelist): What is the earnings breakdown between potash and salt?

Witmer: It depends on potash prices, but it is about one-quarter potash and three-quarters salt. Compass should trade at a minimum of 13 times earnings. Our one-year target is 100 a share, or more.

Is Compass sexy? Not at all. Does it have a moat? Yes, a huge one. Like Contango, it’s another firm with a strong competitive advantage based on being the lowest cost producer in a commodity industry.

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