Compass Minerals International Inc (NYSE:CMP)’s outlook is one of buoyant sentiment as it continues to post exciting top-line revenue growth. But the risk I see is around whether the company’s recent financial position is sustainable given the way it currently manages its capital. In addition to this, it seems like the market is overly optimistic about the business, with is shares trading above its potential intrinsic value. I will touched on some key aspects you should know on a high level, around its financials and growth prospects going forward.
Firstly, a quick intro on the company – Compass Minerals International, Inc., produces and sells salt, and specialty plant nutrition and chemical products primarily in the United States, Canada, Brazil, and the United Kingdom. Started in 1993, it operates in United States and is recently valued at US$2.28B.
There’s no doubt CMP is delivery on its promises, with a soaring annual revenue growth of 19.89% . Over the past five years, sales has risen 2.73%, lifted by prior years of higher capital expenditure, which most recently reached US$114.10M. With continual reinvestment into business operations, a return on investment of 21.90% is forecasted for the upcoming three years, according to the consensus of broker analysts covering the stock. Net income is expected to increase to US$99.43M over the next year, and over the next five years, earnings are expected to rise at an annual rate of 25.48% on average, compared to the industry average rate of 8.97%. These figures illustrate CMP’s strong track record of producing profit to its investors, with an efficient approach to reinvesting into the business, and a buoyant future compared to peers in the sector.
Limiting your downside risk is an important part of investing, and financial health is a key determinant on whether CMP is a risky investment or not. Two major red flags for CMP are its debt level exceeds equity on its balance sheet, and its cash from its core activities is only enough to cover a mere 10.78% of this large debt amount. Furthermore, its debt-to-equity ratio has also been increasing from 95.75% five years ago. Although, EBIT is able to amply cover interest payment, cash management is still not optimal and could still be improved. Or the very least, reduce debt to a more prudent level if cash generated from operating activities is insufficient to cushion for potential future headwinds. The current state of CMP’s financial health lowers my conviction around the sustainability of the business going forward. CMP has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities. CMP has managed its cash well at a current level of US$36.60M. However, more than a fifth of its total assets are physical assets and inventory, which means that in the worst case scenario, such as a downturn or bankruptcy, a significant portion of assets will be hard to liquidate and redistribute back to investors.
The current share price for CMP is US$67.30. With 33.83 million shares, that’s a US$2.28B market cap – which is too high for a company that has a 5-year cumulative average growth rate (CAGR) of 2.99% (source: analyst consensus). With an upcoming 2018 free cash flow figure of US$95.60M, the target price for CMP is US$49.36. This means the stock is currently trading at a massive premium of 36.34%. Also, comparing CMP’s current share price to its peers based on its industry and earnings level, it’s overvalued by 329.19%, with a PE ratio of 53.93x vs. the industry average of 12.57x.
In order to invest in CMP, you have to believe in its growth story, which is a strong one. However, my main reservation with the company is its financial health, as well as the possibility that it is currently overvalued. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.