Some of what this guy has to say about Compass may interest some...

Some of what this guy has to say about Compass may interest some RWD investors. ***See comments about niche potash business and takeover potential***


Compass Minerals: Is Panic Selling In The Potash Space Unlocking A Value Opportunity?

http://seekingalpha.com/article/1589412-compass-minerals-is-panic-selling-in-the-potash-space-unlocking-a-value-opportunity?source=yahoo


A Case of Panic Selling...
The recent news of the demise of the "cartel" structure governing potash production and sales has caused a dramatic selloff in all the related names in the sector. Potash Corp of Saskatchewan (POT), Sociedad Quimica y Minera (SQM), Intrepid Potash (IPI) and Compass Minerals (CMP), have all witnessed a sharp decline in price - with some companies down more than 20% in one day.

I believe that one company is not like the others and have elected to put my money where my mouth is. That company is Compass Minerals. I had initially begun my research into Compass several weeks ago, and was lamenting the fact that the stock had already advanced considerably in the past several months. This morning I was quite excited to see the company decline to more reasonable price levels and purchased some shares. Despite producing commodities, I would hesitate to call Compass a "commodity business" as the company retains some significant advantages over other names in the space that I believe make it a great business to hold.

Diversification of Revenue: 75% of the Company's Business Is Not Potash Related
As opposed to being a pure play in the Potash space, Compass produces three essential chemicals. The first is Salt, with the company owning and operating one of the largest mines in North America in addition to smaller mines and evaporation pools. As a contributor discussed previously, the location of the mine near the Great Lakes and in the "Snow Belt" makes for both lower transportation costs and consistent business - given the location of the mine in the midst of a geographic region that typically receives a large annual amount of snowfall and the significant costs of moving large quantities of rock salt and related deicing chemicals.

The second compound produced by the company is Magnesium Chloride, the "go-to" chemical for consumer and commercial de-icing needs. As previously discussed, these chemicals are in constant demand every year due to seasonal fluctuations - creating an excellent source of stable and repeat business.

The combination of salt and magnesium chloride production accounts for 75% of Compass's business in 2012, revealing that the recent sell-off of over 20% in early market hours indicates the Potash producing business of Compass has been dramatically written down due to, in my view, irrational investor pessimism.

***Its Potash Business is a Niche One***

The third chemical produced by Compass is Sulfate of Potash. Accounting for 24% of the company's 2012 revenues, Sulfate of Potash is a specialized type of Potash utilized as a fertilizer for crops with specialized nutrient needs, either by virtue of their biology or the environment which they are grown in. As a specialized derivate of Potash, Sulfate of Potash production is limited. Compass Minerals has an annual capacity of approximately 390,000 tones - a significant market share of this specialized fertilizer market that is distinct from the more common Muriate of Potash which is produced in massive quantities by large, specialized companies in the fertilizer sector.

I believe that because of this specialized niche, Compass will be able to effectively navigate any near-term difficulties caused by the collapse of the "cartel" model in the broader, bulk Potash industry. Another possible benefit in the long term would be lower production costs for Sulfate of Potash, as Muriate of Potash is utilized as a feedstock in production. A decline in Muriate of Potash prices could lead to lower margins for Sulfate of Potash production, softening any potentially negative fallout from the changes in the broader Potash production industry.

The Numbers on Compass
Currently priced at $72.30 per share with a P/E of 25 and a market cap of $2.4 billion, CMP has declined to almost three-year lows today. Despite this fact, the company pays a dividend that has increased from $0.45 per quarter to $0.55 per quarter, currently yielding 3%. The company also has a history of increasing dividends, with payments more than doubling in the past decade.

With cash per share of $5.27 and a book value of $15.65, shareholders are paying a considerable premium for the company, something that I believe is warranted because of the fact that the company owns almost all of its mining properties, with the remainder on long term leases (with some extending until 2060), the essential nature of its product and the significant, unquantifiable value of both the future resources contained within the mines and their geographic location.

Though the company's payout ratio stands at .71, a number that many would assume to be high, I believe that natural disasters impacting cash flow during 2012 (in which a tornado disrupted some of the company's Canadian salt production operations and damaged facilities) are partially to blame.

***Potential to be Acquired?***
Depending on the long-term fallout of the changes in the potash industry, the specialized niche Compass operates and its small size, I believe that there is significant potential for the company to be acquired in the near future by a larger multi-national conglomerate or a potash producer seeking to establish a dominant position in the specialized Sulfate of Potash market. Though I would not purchase shares with the speculative intent for the company to be acquired, I believe that it is still a good thing to think about.

Thoughts on Recent Price Action and How to Play It
As with any company that is subject to broader industry based volatility, I believe that it is extremely important to be both comfortable about the future prospects of the company and the underlying strength of its business. While I do believe that prices do have the potential to go lower, from observing the rapid retracing from $64 to over $70 - I believe that the market is beginning to realize that it overreacted in selling Compass heavily. I have initiated a half a position in Compass and I'm seeking to employ dollar cost averaging in the event of future and in my mind, quite irrational, selling pressure.

Risks

Due to the large amount of uncertainty and panic selling in the market, I believe that investors must keep an eye for risk and employ dollar cost averaging if they decide to make a purchase in the near term. While I believe that Compass possesses intrinsically attractive characteristics that make it a good business, I believe that one must approach purchasing shares with caution in the coming days due to the widespread uncertainty about the future of the Potash industry and potential further declines in the price of the company's shares.

Due to the fact that 75% of the company's business is involved in salt and related de-icing product sales, weather is also an important factor that can account for volatility in earnings. While snow might come every year, the degree to which it snows varies considerably and thus influences the demand for the company's products.

Another area of risk to be aware of is the potential of natural disasters, as seen in 2012, impacting the operations of the company. In addition to weather related natural disasters, a geologic disturbance or engineering failure could cause a disaster in one of its mines, forcing the company to cease or reduce operations until adequate repairs are made and compliance regulations are satisfied.

Final Thoughts
I believe that Compass Minerals is a company with excellent underlying business fundamentals. While it has been exposed to the recent selling pressure that has plagued the "pure play" Potash sector, I believe that by virtue of its specialized niche in Sulphate of Potash production as well as 75% of its business being totally independent from Potash production, Compass is well situated going forward. The dramatic current price declines provide investors willing to endure near-term volatility an excellent opportunity to own a company with advantageously situated and long lived assets in addition to a healthy and growing dividend.