Climate change is the largest environmental, social, and governance risk to salt producers as permanently warmer winters would result in less need for salt to keep roads safe. However, an average winter hasn’t really changed over the past 30 years. Instead, year-to-year volatility is the larger risk from climate change, which results in the once-stable salt business seeing a wider range of possible outcomes. One only needs to see the recent Texas winter or February in the Midwest, both of which had the most snowfall in the past decade, to see that snow isn’t going anywhere.
Following a mild 2019-20 winter that saw lower deicing salt volumes and subsequently lower prices, the market is questioning the long-term earnings power of Compass Minerals’ (CMP) salt business. Where some see caution as Compass’ profits fell for the second straight year, we see progress on a multiyear turnaround story. As unit production costs continue to fall and prices rebound following an average winter and reduced market supply, we see immediate profit growth for Compass Minerals--catalysts to push the shares closer to our $78 fair value estimate.