Tuesday, August 24, 2010

Compass Minerals International Inc (CMP) likely a future victim in climate change?

As this blog begins to grow its focus on climate change investment strategy, I thought I'd highlight a company that was mentioned in the fine Josh Peters book, The Ultimate Dividend Investor Playbook, which I recently reviewed.  In the book, Mr. Peters, of Morningstar, mentions Compass Minerals International Inc. (CMP) as then (sometime in 2006 or 2007) perhaps being a candidate worthy of consideration for addition to a dividend stock portfolio.

Compass' main business then, as now, "is highway deicing salt, so its profitability is determined by cold, snowy, or icy winter weather." So says Morningstar. 

Morningstar currently provides a three star (average) rating to Compass, meaning they perceive its total stock return outlook to be approximately comparable to the universe of stocks they cover. Owing to a wide economic moat (in this case, a low cost to bring the salt to market), balanced against other factors, is what produces the overall three star average rating.

Me - I think that Compass is an implosion waiting to happen, whether it's this coming winter season, the next year, or in three of the next six years. This is not owing to any prescient thoughts on my part about debt, customer loss, or competitors acting irrationally by pricing below the cost of production. No, I worry about the climate. Notwithstanding occasional contrary hickups, winters are growing shorter and less severe. The scientists say so, and it matches the global warming theory (first postulated by Nobel Prize winner Svante Arrhenius, in 1896).

Trying to continue to maintain salt volumes in the face of this reality, is the investment equivalent of expecting buggy whip makers to continuing to pump out similar volumes, something Morningstar apparently expects, as their quote in their outlook on growth states ...

Growth: We expect long-run demand growth for Compass' salt to be quite minimal. Earnings growth will depend on increasing sales prices and cost efficiencies. (emphasis not in original)

Note that they do NOT say they expect growth for salt to actually decline for Compass, something that can realistically be expected, unless competitors throw in the towel, and they gain a larger share of a shrinking pie. Even if that were to occur, most investors recognize the futility of fighting a secular "headwind". No pun intended.

Climate change investment strategy, as I will begin to explore over the coming while, involves a very few great opportunities, some good opportunities, and a whole lot of businesses to stay away from, unless you have the stomach for shorting stocks.

Compass is one example of a stock I'd be extremely cautious of getting involved with, especially since it is priced at roughly the same PE ratio as the S&P500.

No, if I were you, and thinking of holding Compass for a year or more, I would take Morningstar's rating, in this case, "with a grain of salt".

Disclosure: CMP - no investment position.

On a blog aggregator? Go here, The Confused Capitalist, for additional content and our growing focus on climate change investment strategy.

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