Compass Minerals International: Once Again Underwhelming Results (NYSE:CMP)
Compass Minerals International (NYSE:CMP) remains a disaster in my opinion. After reporting first quarter results a few days ago, the stock tanked again and is now trading below $40 once again. Although my last article was published only about three months ago, we should look at Compass Minerals once again as it is a fascinating case study: A company that has a wide economic moat but is not able to perform like one and is instead struggling and fighting on several fronts.
A few days ago, Compass Minerals reported results for the first quarter and disappointed shareholders as well as analysts. It missed on revenue (by $26.35 million) as well as earnings per share (by $0.59). Aside from the fact that much better results were expected the quarterly income statement can be seen as solid – at least when comparing it to the same quarter last year.
Revenue increased 6.3% year-over-year from $331.5 million in Q1/22 to $352.4 million in Q1/23. Operating earnings also increased from $20.4 million in the same quarter last year to $27.9 million in Q1/23 – an increase of 36.8% YoY. But while these two metrics could improve, Compass Minerals had to report a loss again and instead of $0.07 in earnings per share it reported a loss of one cent per diluted share.
When looking at the salt segment, revenue increased 12.5% year-over-year to $308.1 million. Sales volume was up about 2% due to more favorable weather and while sales volume for highway deicing increased about 3.4%, sales volumes for Consumer & Industrial declined about 2.1%. And the average price per ton also increased from $80/ton to $88/ton.
When looking at the Plant Nutrition segment, revenue declined from $54.6 million in Q1/22 to $41.6 million in Q1/23 – resulting in a decline of 23.8% YoY. And while the average price per ton increased from $660/ton to $924/ton (resulting in a 40% increase), volume declined from 83 thousand tons in Q1/22 to 45 thousand tons in Q1/23 (resulting in a decline of 46%).
And despite revenue declining 24% and costs increasing with a high pace – distribution costs increased 19% and operating costs increased 26% – EBITDA for the segment rose by 5%. I honestly couldn’t figure out where these $15 million in necessary difference to lead to an increasing EBITDA stemmed from, but who am I to question the results.
And while investors were disappointed about Compass Minerals missing on revenue as well as earnings per share, the revised guidance for 2023 was also a big disappointment (and probably a shocker).
Compass Minerals is expecting revenue in fiscal 2023 to be between $1,145 million and $1,290 million – compared to $1,244 million in revenue in fiscal 2022. EBITDA is expected to be between $185 million and $285 million. And for the salt segment, management stated that results will probably come in below the midpoint of the guidance (due to higher product costs and below-trend sales). And for Plant Nutrition, management is now expecting revenue to be only between $155 million and $225 million (compared to $200 million to $240 million in its previous guidance).
Additionally, the company is assuming capital expenditures to be between $165 million and $220 million in fiscal 2023 (with $75 million to $120 million being spent on the Lithium projects) and it will therefore be almost impossible for Compass Minerals to generate any free cash flow this year.
Improving Balance Sheet by Penalizing Shareholders
One of the major problems and reasons for concern was the company’s balance sheet – and therefore we should pay close attention. When looking at the numbers on December 31, 2022, the balance sheet improved and compared to three months earlier, cash and cash equivalents increased from $46.1 million to $146.1 million. Additionally, long-term debt declined from $947.6 million last quarter to $832.1 million right now. And this resulted in total stockholder’s equity almost doubling from $256.4 million three months ago to $509.8 million at the end of December 2022.
There is a very simple reason for the improved balance sheet – the investment of Koch Minerals & Trading, LLC. Compass Minerals used the investment in part to reduce debt levels and the rest can be found as cash on the balance sheet – but probably not for long as the company will have high capital expenditures in fiscal 2023 (see section above). In my last article I already wrote:
In September 2022, it was announced that Koch Minerals & Trading will invest $252 million in Compass Minerals International. For this amount, KM&T will purchase 6.8 million shares of CMP and own about 17% of outstanding shares. This private placement is expected to close in Q4 and will increase the number of outstanding shares by 20%.
And while Compass Minerals had about 34.1 million outstanding shares on December 31, 2021, it had 39.75 million on December 31, 2022. The balance sheet improved a little bit by diluting its shares.
But the situation is far from being great. Compass Minerals still has high quarterly interest expenses of $13.9 million adding up to $55.6 million in annual interest payments. And while Compass Minerals is proudly presenting $432 million in liquidity, this is also including $286.5 million of availability under a $300 million revolving credit facility (and this would lead to higher debt levels again).
Take a Calculated Risk?
And of course, a company should invest in the future, and it is also an important part of every business and investing to take some calculated risks. Other companies – like Meta Platforms (META) or Intel (INTC) (to name two examples) – are also spending huge amounts to invest in the future. And when listening to CEO Kevin Crutchfield’s opening statement, the current initiatives could pay off:
We continue to make strides in our efforts to reposition Compass Minerals for accelerated growth, reduce winter weather dependency and create sustainable value for our shareholders by expanding our essential minerals portfolio into the adjacent markets of battery grade lithium and next generation fire retardants.
But like I have written in my past articles, I just don’t like the combination of terrible news. In 2021, Compass Minerals had to cut the dividend from $0.72 per quarter to $0.15 per quarter (which was certainly the right move – and in my opinion, they should have eliminated the dividend entirely).
But it is not only the dividend cut and the high debt levels – see above as well as past articles. The major problem why Compass Minerals International is taking too much risk is the mediocre performance in the past several years and missing free cash flow to fund expansions. When looking at the income statement over the past 10 years, we see revenue being more or less stable – and this could still be seen as acceptable. However, a company with a wide economic moat should be able to increase revenue. And when looking at free cash flow, we see wild fluctuations and especially earnings per share seem to be in a downward trend since 2015.
Additionally, we can look at the company’s margins. And while fluctuations are acceptable for Compass Minerals due to the nature of the business, gross and operating margin must be described as constantly declining and not so much as fluctuating in a cyclical manner.
And we should point out again that Compass Minerals has a wide economic moat around its business – to be honest, it has a great economic moat and one that is hard to destroy. Keeping that in mind, it is even more disappointing that management does not seem to be able to use the economic moat to report great results.
Considering the wide economic moat protecting Compass Minerals and leading (at least in theory) to stable cash flows should enable the company to take a calculated risk. And one of these calculated risks is the huge investments to extract and sell the lithium. The project could also be extremely profitable in 5 to 10 years. However, I think that Compass Minerals will either have to take on additional debt or sell additional shares (like it did now with Koch). And while I am all for investing in the future (and taking some risks), a company should at least be well financed and generate stable free cash flows to take huge risks (like Meta Platforms). Compass Minerals is just not the business I like to invest in – despite having a wide economic moat around the business.
Despite not seeing Compass Minerals as an investment, I won’t advise to short the stock and keep my “Hold” rating. This is mainly for two reasons. First, the stock is already trading at a stock price where a lot of negativity seems priced in. Second, the economic moat should discourage us from shorting the stock as it is dangerous to short companies with the ability to defend themselves against competitors.
And right now, I rather see management mistakes being the reason for the mediocre performance. Compass Minerals still has a wide economic moat around its business that is difficult to attack. Nevertheless, I would not be surprised if the stock would decline to its lows around $30 again in the coming weeks.