Compass Minerals (CMP): A Basic Materials Story

[Dividend Watcher]

I just got an analysis of Compass Minerals published on SA today.

I was looking for some basic materials companies to choose from for our portfolios. I already have BBL in mine and it's at my desired allocation, the air companies are a little too steep for me here, ADM just isn't getting me excited at these prices, yada, yada, yada. You know, excuses for everything.

So, as I was screening through the January CCC list, I noticed CMP was keeping pretty steady at the 10% dividend growth rate mark and I've heard very little about them. Other CMP articles on SA have been mostly fluff with no deep information. I've glanced at them before but for some reason it didn't click. Seeing as I was freezing my you-know-what off and tired of shoveling/snowblowing here everyday since the beginning of the year, I thought I'd dig a little deeper and spent the last week researching the company and snow/ice removal technology. By the time I was done, I was comfortable enough to contemplate taking a stake in them. Oh, and I realized the plow drivers around here are not being as competent and diligent as they could be.

I like the new CEO (since 2013). He seems to want to grow the company but not take it too far from its circle of competence unlike some empire builders elsewhere. Since they've been public, every shareholder letter and a lot of press releases have talked about shareholder returns so I think the concept is also on the board's mind. The message has been consistent through the CEO changeover. I think this bodes well for the dividend since shares have been essentially steady for the 10 years they've been public. In other words, buybacks don't seem to be a priority for their cash.

Some further information is I'm not sure how accurate book value is. They've got two big holes in the ground for salt mines and I have no idea how to value them. Since they've been there a while and they were part of the divestiture, their carrying value may be way below what they are worth to another party. Because of this, price/book may be skewed.

Now, I wouldn't be surprised if the dividend growth slowed to the high single digits -- it is a commodity company -- but they've still got room in the payout ratio. Part of that may depend on future bolt-ons they're looking at.

Wouldn't you know it, the price jumped 3% today on no big news that I could find. No, it wasn't me. The article was published way after the opening bell. My target is just under $90 and I may add if the cash is there.

If you're interested, you can read the article here.

[EricL]

Interesting company that I hadn't looked at before. The debt is a little higher than I'd like but it seems to be a good performing company. 2.9% yield isn't bad and a 10YR dividend CAGR of nearly 10% is nice too.

Thanks for sharing.

[benjamen]

This company, like several others I have looked at recently, operate with a lot of debt. It is smart that CMP is converting old, high interest debt into new, low interest debt. However, in the event of higher interest rates, how will it change how this business operates (paying off debt versus dividend raises)?

[Dividend Watcher]

I understand both your concerns about debt. I'm leery too but management seems to have handled it well.

To answer Benjamin first. When interest rates change, their interest costs will be unaffected. They've only have 2 secured senior notes outstanding: a term loan due in 2017 ($380M) and the note I mentioned due in 2024. They also have a revolver which, in total, is less than $100M. As best as I can tell, they are all at fixed rates.

I graphed cash & equivalents vs. LT debt:

   

I was going to add debt/equity but for the first 4 years, they had a huge negative equity due to no retained earnings and commitments to IMG Global (the original company) and Mosaic which was part of the recapitalization program. I don't have the details on that whole affair so can't speak further about it. The graph was unreadable because of those large swings.

Also, for the last 5 years, interest coverage averaged around 7-10x. I don't have all the details about 2014 because the full financials aren't out yet.

They due have some currency risk with the Canadian dollar and the British pound. Other countries they market to are a very small percentage. Currency hasn't seemed to affect them much over the last 10 years.

[benjamen]

(03-03-2015, 10:01 AM)Dividend Watcher Wrote: I understand both your concerns about debt. I'm leery too but management seems to have handled it well.

To answer Benjamin first. When interest rates change, their interest costs will be unaffected. They've only have 2 secured senior notes outstanding: a term loan due in 2017 ($380M) and the note I mentioned due in 2024. They also have a revolver which, in total, is less than $100M. As best as I can tell, they are all at fixed rates.

I graphed cash & equivalents vs. LT debt:



I was going to add debt/equity but for the first 4 years, they had a huge negative equity due to no retained earnings and commitments to IMG Global (the original company) and Mosaic which was part of the recapitalization program. I don't have the details on that whole affair so can't speak further about it. The graph was unreadable because of those large swings.

Also, for the last 5 years, interest coverage averaged around 7-10x. I don't have all the details about 2014 because the full financials aren't out yet.

They due have some currency risk with the Canadian dollar and the British pound. Other countries they market to are a very small percentage. Currency hasn't seemed to affect them much over the last 10 years.

The 2017 note of $380M is the one that concerns me. If interest rates go up significantly between now and then, the refinance of that term loan will be at the higher rate. The company could pay off the loan partially or in full (net income of the last three years: 89M, 104M, and 218M) since they have 267M in cash on hand. They should be able to handle their debt, but it would be something to watch

http://finance.yahoo.com/q/is?s=CMP&annual
http://finance.yahoo.com/q/bs?s=CMP+Bala...eet&annual

[Roadmap2Retire]

Interesting. Thanks for the analysis, DW. I hadnt heard or looked into this company before. Thanks for the analysis