How investors can profit from work in the salt mines
This advisory likes the firm that runs a huge Canadian salt mine. We also look at its income stock picks and almost cheerful market outlook.
The worlds largest rock salt mine is in Goderich, Ontario.
If youve been to Goderich you know that it has a fine harbour on
Lake Huron. (You get a splendid view of the harbour from the old railway
bridge that has been converted to a pedestrian bridge, by the way
not that were here to make anyones travel plans.)
The company that owns all that salt is in Overland Park,
Kansas. And all the salt it mines adds up to a very solid investment for
uncertain times, according to Louis Rukeysers Wall Street.
The Kansas-based company is Compass Minerals International
(NYSE-CMP) but because we like talking about Canada, well tell you
about the Goderich mine first.
Immune from recession
The huge salt mine in Goderich, says this advisory,
provides a built-in advantage over competitors. Salt can be
extracted from the Goderich mine at a cost of 30 to 40 per cent less than
that of the average salt mine.
And the harbour isnt just another pretty place: because
the mine is near the water, shipping costs are a full 50 per cent less
than they would be if the company shipped by truck or rail.
All of these advantages make Compass the dominant salt company
in North America. It is the number one producer of rock salt on the continent
and the number two producer of salt for general use. Its also a
major producer in the United Kingdom and it owns other salt assets around
the world (although we cant tell you whether any of them have a
bridge as nice as the one in Goderich).
As youd imagine, comments the advisory,
the salt industry is extremely reliable and almost immune
Over the past 30 years, the volume of salt sold in North
America has risen about 1 per cent per year. Not exactly chart-topping
numbers, but highly respectable. Especially when you consider that prices
rise about 4 per cent a year. And theyre due to go up even more
closer to 8 per cent over the next year or so as demand
For one thing, winter is here.
A good winter for rock salt
Two-thirds of Compass revenue comes from rock salt.
Rock salt has many uses in agricultural and industry, but its chief use
is on the roads in winter. That accounted for a cool 45 per cent of total
revenue last year.
As the weather fluctuates from one year to the next, the
companys revenues can jump around. But all those who shoveled out
from under the storm that thundered across eastern Canada less than a
week ago will undoubtedly swear that this is going to be a very good winter
for rock salt.
Compass doesnt have a true monopoly, but it doesnt
have much competition, either. Chemical and mining companies that produce
salt dont expend much effort bringing it to market.
On the other hand, Compass hones in on its markets very carefully,
targeting its rock-salt sales to state, county, province and local
governments in the U.S. Midwest and in central Canada, where winter weather
is more predictable boosting profit margins because inventory doesnt
sit around. With 75 depots around the continent, salt gets shipped
quickly whenever and wherever its needed.
You would think, rightly, that all this winter activity would
make the companys earnings chart look very ragged with its seasonal
ups and downs. Compass is taking steps to smooth this out, by offering
discounts in the summer months. Its paying off, too. In the third
quarter of 2007, its sales jumped 13 per cent from the year before.
Funding the dividend
Oddly enough, for a salt-of-the-earth sort of company, Compass
has a lot of debt and a low bond rating. It does generate enough reliable
cash flow to pay down debt gradually.
Theres one reason it doesnt scurry to pay down
debt even more quickly, and its a good one. It is funding a high
dividend of $1.28, accompanied by a yield of 3.35 per cent.
Although its balance sheet isnt squeaky clean, it
seems healthy enough for investors to count on the dividend payment being
made for some years to come, adds the advisory.
Slow but steady seems to be the pace for this salt stock.
Compass has excellent prospects for growth over the long term, concludes
the advisory. It cites one Wall Street analyst who has set a 12-month
target price of $45. This is an intriguing figure, because the stock closed
yesterday at $40.97, already $5 ahead of its price when this issue of
Louis Rukeysers Wall Street was published a short while ago.
Six income stocks
In the spirit of Christmas, we offer six more income stocks
that are consensus picks by the analysts the advisory consults. The first
is pipeline company TEPPCO Partners L.P. (NYSE-TPP), a limited
partnership (roughly speaking, the U.S. equivalent of an income trust),
which has a yield of 7.0 per cent. Two are utilities: Southern Company
(NYSE-SO), with a yield of 4.1 per cent and Duke Energy (NYSE-DUK),
whose yield is 4.2 per cent.
Three are household names: consumer stocks Johnson &
Johnson (NYSE-JNJ) and Procter & Gamble (NYSE-PG), with
yields of 2.4 and 1.9 respectively, and manufacturing giant 3M (NYSE-MMM),
which yields 2.2.
But is there a case to be made for Canadian investors buying
U.S. income stocks? Yes, says an analyst we consult regularly.
Of course if you own a dividend-paying stock from the United
States, you pay a 15 per cent withholding tax (unless you hold it in your
RRSP). But you still get much of the benefit your current yield
with TEPPCO would still be close to 6 per cent after tax and history
shows that stocks with rising dividends consistently generate rising capital
December 4). And if indeed the U.S. is drifting into an economic slowdown,
income stocks like these should attract even more money.
Not least, your Canadian dollar makes U.S. stocks more affordable
than they were last Christmas.
Gloom is an overreaction
Finally, as we scan the market letters that come across our
desk to see who stands where in the recession-or-no-recession debate,
we take note of this advisorys position.
Things are not hopeless, says Mr. Nicholas Lanyi, who has
assumed the editorship of Wall Street in place of the late Mr.
Rukeyser. The gloom is an overreaction, just as the exuberance was,
Third quarter earnings were not that terrible, he points
out. In fact, take away the housing sector and financial services and
S&P 500 earnings were up 4 per cent.
True, the financial-services sector will continue to
suffer, he admits. This will drag down statistical measures
of economic and stock-market strength: fourth-quarter and corporate earnings
may look lousy, and weve already seen that reflected in stock prices.
Much of the economy is in good shape, in Mr. Lanyis
view. Hes counting on those two lifebuoys of the contemporary economy
international growth and consumer spending to keep it afloat.
Looking a year ahead, he believes we will get through
the credit crisis without falling into recession, and that large
U.S. companies not exposed to subprime mortgages will continue to grow
especially if they do business in fast-growing foreign economies.
So theres a pretty firm vote in the no-recession camp.
Following his non-pessimistic line of thought, the editor adds that solid
investment returns will still be there for those who put together a judicious
mixture of stocks, funds and bonds. Mr. Lanyi concludes: We should
all be able to enjoy the holiday season without getting weepy. Less gloom!
Maybe all your portfolio needs is a little more salt.
Speaking of seasoning, we hope you have a happy holiday season.
The next Daily Buy-Sell Adviser will appear on December 27.