Compass Minerals Earnings: Salt Profits on Path to Recovery Despite Warmer Winter Weather

We maintain our $65 per share fair value estimate for Compass Minerals CMP after updating our model to incorporate the company’s first-quarter results. Our wide moat rating is also unchanged.

Compass shares were up 2% at the time of writing as the market reacted positively to management’s outlook that salt adjusted EBITDA would come in closer to the $235 guidance midpoint versus the prior quarter when management guided to the lower end of the range, despite warmer winter weather and fewer snow events. We agree with management’s assessment as we had forecast salt profits to come in closer to the midpoint than the bottom of the guidance range.

Additionally, we think the market is reacting to the news that Compass announced it acquired the remaining 55% of Fortress, the wildfire retardants producer. Management guided that Fortress, which has not previously generated revenue, would generate revenue and positive EBITDA this year after winning contracts to supply wildfire retardants to the U.S. Forest Service for the 2023 fire season.

However, at current prices, we view Compass Minerals as materially undervalued with shares trading a little more than 50% below our fair value estimate. Shares trade just slightly above our downside scenario, which produces a fair value estimate of $30 per share. Our downside scenario assumes lower salt volumes and profits as well as little recovery in plant nutrition volumes and profits. This scenario also assumes lower market share for Fortress in the U.S. wildfire retardants market and the lithium project is only completed to phase one of 11,000 metric tons of annual production capacity as lower long-term lithium prices make the phase two expansion value destructive. As such, we view the current price as an excellent opportunity for long-term investors to pick up Compass Minerals shares with a solid margin of safety.