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Compass Minerals Struggles As Customers Hope for a Warm Winter

By Dan Caplinger – Oct 24, 2016 at 6:51PM

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Tough conditions face the provider of road salt and plant nutritional products despite long-term optimism.

Diversification often helps businesses, and for Compass Minerals International (CMP 2.29%), the combination of road salt for highway deicing and plant nutritional products offers two different markets that have much different seasonal characteristics. Nevertheless, Compass has had to deal with some tough conditions over the past year, and coming into Monday's third-quarter financial report, Compass investors were bracing for a big decline in revenue and net income.

Unfortunately, not only was Compass unable to avoid the full brunt of its expected hit, but it also ended up doing still worse. Nevertheless, the company has some optimistic thoughts about its future. Let's take a closer look at the latest from Compass Minerals and what it said about the months to come.

Image source: Compass Minerals.

Compass' financials take a dive

Compass Minerals' third-quarter results had a lot of negatives in them. Revenue fell by 23% to $179.6 million, declining at roughly double the rate that investors had expected to see from the company. Net income fell by nearly two-thirds to $9.1 million, and that produced earnings of $0.27 per share. That figure was $0.01 per share less than the consensus forecast among those following the stock.

Looking more closely at Compass Minerals' results, the company's two businesses both faced their own difficulties. The road-salt business saw operating earnings fall by a third from year-ago levels, and Compass said that lower pre-winter demand for deicing salt was the primary culprit for the decline. Weakness in the British pound also weighed on the segment's bottom line, as did a less favorable product mix within its sales. Even though consumer and industrial sales prices stayed steady, a big drop in highway deicing prices also hurt Compass' business.

Meanwhile, segment earnings from the plant nutrition business dropped more than 70% to $2.5 million, with lower selling prices more than offsetting minor increases in sales volumes for the business. Even though the performance didn't look good, Compass was still pleased that the company managed to see a year-over-year improvement in sales volume for the first time in six quarters.

Compass did its best to lessen the blow from its revenue drop by keeping costs under control. Overhead expenses were down 6% because of ongoing cost-reduction initiatives, but Compass will have to do even better to offset its difficulties elsewhere.

CEO Fran Malecha tried to look ahead, saying that Compass plans to keep "improving our ability to cost-effectively serve customer demand in both businesses," as well as making the most of its late-2015 acquisition of a minority stake in Brazilian plant nutrition specialist Produquimica.

Can Compass rebound?

The problem, though, is that Compass has continued to reduce its guidance for its full-year results. The company now believes that it will earn between $2.80 and $3.10 per share for 2016, down from its most recent guidance of $3.25 to $3.65 per share in earnings. Lower awarded bid prices for highway deicing products spurred Compass to adjust its outlook downward, and volume declines could also hurt the company. Even better conditions in the plant nutrition market won't be enough to offset pressure on the salt front, and the estimate includes $0.15 to $0.20 per share in positive contributions from the acquisition of Produquimica.

Nevertheless, Compass is still optimistic. The company has plans to continue its major capital investments, which are intended to make the most of Compass' core assets and help bring about growth in the future.

Compass Minerals shareholders didn't seem to have a strong reaction to the news, with the stock not moving at all in after-hours trading following the announcement. At this point, a lot will depend on whether the early winter months are kind or cruel to municipal and state highway departments who've banked on a mild winter season in bidding on smaller amounts of road-ice fighting products this year. If those gambles don't pay off and Mother Nature proves buyers wrong, then Compass could be a big winner in the long run.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Compass Minerals. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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