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Why Compass Minerals Stock Rose 13% in September

By Reuben Gregg Brewer - Oct 9, 2019 at 9:06AM

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Compass Minerals came back strong last month as investors realized that the future looks bright.

What happened

Shares of salt and plant nutrition specialist Compass Minerals International (CMP 3.65%) gained 13% in September, according to data provided by S&P Global Market Intelligence. While that was a large move, it was only up about 1% over the past two months. That's noteworthy because Compass' stock fell a painful 11% in August after the company reported less-than-inspiring second-quarter earnings

So what

Effectively, September's bounce was a recovery from the sizable drop during the prior month. Compass reported earnings on Aug. 6 that fell short of expectations. There were notable hits on both sides of the company's business, but there was one issue related to both: heavy flooding along the Mississippi River.   

Compass' logistics operations for salt deliveries were disrupted by one of the longest flooding seasons on record, as was the demand side of the equation for fertilizer. This effectively delayed shipments and caused second-quarter results to be relatively weak. And that wasn't the only issue, with soft pricing on the fertilizer side also a problem, but it was a big overarching theme for the period. Investors reacted to the bad news as you might expect. 

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Image source: Getty Images.

As investors absorbed the company's results and dug into the bigger picture, however, Wall Street got more comfortable with the fact that the weak first half would likely set up a stronger second half. Indeed, Compass expects strong pricing for salt coupled with a delivery pickup (partially to make up for the flooding-related delays) to lead to a strong second half for its salt operations. It also expects to see a volume uptick on the plant nutrition side as farmers increase fertilizer use following low application levels in the spring. In other words, Compass' second half is likely to be pretty solid and the big August drop may have been an overreaction. 

Now what

Having bounced back from a bad August showing, investors shouldn't jump at Compass today. Buying that dip is obviously no longer a short-term opportunity. And with the stock up 30% so far in 2019, nearly twice the gain of the S&P 500, it's probably best for most investors to sit on the sidelines. That's true despite the stock's 5.3% yield. One key reason for this is that the company's debt-to-equity ratio has skyrocketed over the past few years, going from around 1.8 in 2017 to nearly 2.6 today (notably helped along by an acquisition). So while dividend-focused investors might find the high dividend yield coupled with an expected uptick in financial results in the second half enticing, Compass' elevated leverage levels suggest that caution is in order.   

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Compass Minerals. The Motley Fool has a disclosure policy.

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