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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 world’s largest rock salt mine is in Goderich, Ontario. If you’ve 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 we’re here to make anyone’s 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 Rukeyser’s Wall Street.

The Kansas-based company is Compass Minerals International (NYSE-CMP) but because we like talking about Canada, we’ll 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 isn’t 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. It’s also a major producer in the United Kingdom and it owns other salt assets around the world (although we can’t tell you whether any of them have a bridge as nice as the one in Goderich).

“As you’d imagine,” comments the advisory, “the salt industry is extremely reliable — and almost immune from recession.”

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 they’re due to go up even more — closer to 8 per cent — over the next year or so as demand outpaces supply.

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 company’s 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 doesn’t have a true monopoly, but it doesn’t have much competition, either. Chemical and mining companies that produce salt don’t 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 doesn’t sit around.” With 75 depots around the continent, salt gets shipped quickly whenever and wherever it’s needed.

You would think, rightly, that all this winter activity would make the company’s 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. It’s 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.

There’s one reason it doesn’t scurry to pay down debt even more quickly, and it’s 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 isn’t 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 Rukeyser’s 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 gains (Daily Buy-Sell Adviser, 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 advisory’s 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,” he asserts.

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 we’ve already seen that reflected in stock prices.”

Much of the economy is in good shape, in Mr. Lanyi’s view. He’s 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 there’s 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! More cheer.”

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.