Why This Much-Overlooked Mid-Cap's Feeling Saltier Than Ever

Processing plant and cargo loading facilities on a lake, with a ship taking on cargo.

When your primary business is selling road salt to highway departments, it's natural not to expect very much during the summer months. Compass Minerals International (NYSE: CMP) has diversified into the plant nutrition industry in an effort to flatten out its annual revenue and profit cycles, but the salt business still plays a large enough role in its overall operations that the second quarter is almost always its weakest of the year.

Coming into Monday's second-quarter financial report, Compass investors had no illusions that the company would avoid the typical losses it almost always posts at this time of year. What they did want to see, though, were signs that the coming winter season would be good, and early signs are giving shareholders reason for optimism.

Compass deals with more red ink

Compass Minerals' second-quarter results showed just how susceptible the company in the warm months. Revenue was $246.7 million, up 8% from year-ago levels, which was just about right where most investors had expected to see the business. However, losses widened to $7.6 million, or $0.23 per share, which was worse than the $0.16 per share in red ink that the consensus predicted.

Fundamentally, Compass saw some reasons to celebrate . In the salt business, segment revenue climbed 11%, with a big bounce in sales volumes offsetting more modest declines in average selling prices for Compass' products. The company said late snows in North America in August depleted stockpiles of road salt in many areas of the U.S., and that meant municipal and state governments needed to make some late purchases in the early spring in order to get through the year. In addition, U.K. buyers took advantage of the early summer timeframe to make restocking orders. Operating earnings for the salt unit were up 17%, with operating margin expanding and helping to create double-digit gains in adjusted pre-tax operating earnings.

Results didn't hold up quite so well in the plant nutrition area. In North America, segment revenue was higher by 3%, with both pricing and unit volume posting modest gains. However, increased production costs led to a nearly 20% drop in operating earnings for the segment. Meanwhile, in South America, revenue was higher by 8% due to strong pre-season demand for specialty nutrient products, but falling sales of chemicals offset those gains to some extent. Disruptions due to a truckers' strike in Brazil during the period weighed on performance, and the falling Brazilian real in U.S. dollar terms also hurt financial results. Operating earnings in South America were down 13% from year-earlier figures.

CEO Fran Malecha liked how Compass had consistent success in driving sales. "Our second quarter is typically our lowest earnings period," Malecha said, "however, I am pleased that we delivered top-line growth across all our businesses." The CEO believes that result shows improving fundamental conditions in its markets for the full 2018 year.

What's next for Compass Minerals?

Compass also has high hopes for the remainder of the year. As Malecha put it:

Bid season in North America is already showing signs of positives. According to the company, with 75% of the bidding process on the books, average bid volumes have been higher. What's unclear, though, is how much Compass will be able to take advantage of those stronger conditions, because an 11-week strike at its mine in Ontario just ended in mid-July. Ramping back up will take time, so even strong demand won't let Compass benefit fully from what it believes will be 15% higher contract prices than in 2017.

Even so, Compass remained resolute yet again in keeping its earnings projections unchanged. The company still sees its bottom line coming in between $2.75 and $3.25 per share. The best margins should be in the salt segment, with North America trailing South America in terms of profit potential from the plant nutrition business.

Compass Minerals shareholders didn't react immediately to the news, and the stock was unchanged in after-market trading following the announcement. With the strike over and conditions looking more favorable, there's reason to think the 2018-19 winter season could bring a nice bounce for sales and profits.

10 stocks we like better than Compass Minerals

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor , has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Compass Minerals wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of August 6, 2018

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Info icon

This data feed is not available at this time.

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.