The last two years have seen shares of rock salt and fertilizer company Compass Minerals (NYSE:CMP) melt down from $97.61 in April of 2011 to a recent closing price of $74.38. When a late winter snow in early 2013 sent shares surging back up to nearly $90 per share in mid-May investors thought they had weathered the storm. Suddenly another unexpected event reversed the shares' momentum again as the breakup of a major potash fertilizer joint venture in eastern Europe raised fears of future price drops and sent fertilizer stocks like Potash Corp (NYSE:POT) and direct competitor Intrepid Potash (NYSE:IPI) tumbling.
Compass Minerals prices its specialty SOP, or sulfate of potash, at a premium to Potash Corp's North American prices for MOP, or muriate of potash. However, salt is Compass Minerals' main business, and after two mostly mild winters, the company is hoping that Jack Frost brings some snow with him this year.
Why did salt revenues melt?
Weather has a huge impact on Compass Minerals' revenue; the salt business makes up roughly 80% of overall sales. Two mild winters and an August 2011 tornado sent salt revenues and operating margins back to 2007 levels.
Normally, the company can expect 3% to 4% annual price increases in its salt business. However, this year's bid season for de-icing salt has caused a 3% price decline on average for the contracts that the company was able to negotiate. A decline in salt pricing occurs very infrequently. While sales volumes were higher than the 2012-2013 winter they only retraced about half the loss from the prior year. The price decline is reflective of two straight mild winters and tight municipal budgets. Recent producer price data shows rock salt prices received by producers increased by 1.7% in the third quarter as well as over the last year.
This illustrates that the company was quite aggressive during the 2013-2014 bidding process. Despite the price meltdown, the company expects improved margins in the fourth quarter as well as full year operating margins of 20% due to higher capacity utilization rates in its mines. The company's salt business has not had 20% operating margins since 2011.
2013 fertilizer pricing strong amid falling volumes: Is there a connection?
Compass Minerals sold 61,000 tons of its specialty fertilizer in the third quarter, a 32% decline from last year. Year to date, potash tons sold are down 21%. Like their larger competitors, the company has been aggressive with pricing, despite the clear decline in demand during each quarter. Competitor Intrepid Potash is also an SOP producer and reported a 37% decline in tons sold during the third quarter and a decline of 17% through the first nine months of 2013 when it reported third quarter earnings on October 30. In contrast to Compass Minerals, the average price received by Intrepid Potash in 2013 has slumped nearly 14% while Compass Minerals has received a higher average price each quarter this year against falling demand.
Sulfate of potash has lower chloride content than MOP; using SOP can improve the yields and/or quality of crops like citrus fruits, grapes, potatoes, almonds, and some vegetables. This allows the company to charge a premium over the more widely available muriate of potash. Historically, the premium has ranged from $100-$150. In the third quarter, the premium had increased to nearly $300 per ton against Potash Corp. Q3 North American pricing.
This above normal price spread has allowed the company to beef up production, which is still not at ideal levels, by purchasing MOP in the spot market and blending it into their feedstock to produce a higher cost SOP. In my opinion, this price spread is unsustainable.
Despite volume declines in the first nine months of the year, the company says that it still expects to meet its earlier sales guidance of 150,000 to 160,000 tons of potash in the second half of the year. They would need to sell 89,000 to 99,000 tons of potash in the fourth quarter, which the company has done in two of the last three years. However, the price spread between the two types of potash was much lower in 2012 and 2010. It will be interesting to see how much crop producers buy at the company's expected average selling price of $625 per ton in the fourth quarter given the drop in muriate of potash to roughly $300 per short ton and a premium roughly twice the historical average.
So does it snow or not?
The pertinent question is, will it snow enough? A recent Accuweather US Winter forecast predicts above-average snowfall in up to seven of the company's 11 representative markets, snow and ice in another, and severe storms in yet another two. Like trading or investing, weather prediction is more about probabilities than certainties. Six months ago, there was a strong chance of heavy snowfall this winter, today the situation has moved closer to neutral.
If there is average to above average snowfall in Compass Minerals representative markets, the stock price may pile on top of the snow and climb toward the stocks 52 week high of $91.88 per share in my opinion. If Jack Frost stays away, the stock price would likely melt down to the low 70's or even high 60's. Right now it's an even money proposition.