Ben Claremon from Cove Street Capital talks on Compass Minerals (CMP)
In recent years, Compass Minerals (ticker: CMP) has remained an underappreciated company. Our research suggests, however, that aside from the variability in weather that impacts the company – the primary reasons for concern are abating.
The prior management team misallocated capital into unnecessary capital expenditures and an ill-advised acquisition of a Brazilian company. The margin issues, lack of free cash flow generation, and the increased leverage that resulted from this poor capital allocation have obscured the quality of the company’s asset base. Specifically, within its Salt segment,
Compass owns the largest rock salt mine in North America and remains a leader in salt production for de-icing, consumer, and industrial uses. The company also, within its Plant Nutrition segment, is the only U.S.-based supplier of sulfate of potash, a chloride-free fertilizer that is used in higher-value crops.
The industry structure surrounding the businesses in both segments is very favorable and this leads to high margins and a certain level of pricing power. These are irreplaceable assets that would likely fetch very high multiples if they were up for sale. However, even if the assets are not put on the block, the moves taken by new CEO Kevin Crutchfield are likely to improve margins further, de-lever the balance sheet even more, and improve the productivity of the assets.
While the stock is not dirt cheap at the current valuation, our research suggests that this is a business that is getting more valuable every day and thus has the potential to compound over time.
Author: Ben Claremon of Cove Street Capital