Visible Satellite Image showing Snowpack across the East from last weekend’s storm. Note how the northern edge of the snowcover bisects NYC.

Note: Whilst working on this post, the Fly mentioned CMP as well. Great minds, or something…

While many of my more frequently discussed winter-based stock picks take advantage of cold weather by investing in Natural Gas or Utilities, Compass Minerals is a direct play on snowfall.

In addition to potassium sulfate fertilizer, Compass Minerals’ primary products are highway de-icing salts, namely Calcium Chloride, or CaCl₂. De-Icing salts work by the principle of freezing point suppression, which states that when a salt is de-ionized (dissolves) in water, it will interfere with the formation of the crystal lattice structure of ice and lower the liquid’s freezing point (resulting in the appearance of melting). The degree of freezing point suppression is directly dependent on the number of ions produced, which is why Calcium Chloride, which ionizes into one Calcium ion and two Chloride ions is a better de-icing product than common table salt, sodium chloride, which only ionizes into one Sodium and one Chloride ion. Still, this only lowers the freezing point to about 10F, which is therefore the minimum functional temperature of common rock salt.

Along these lines, CMP has recently announced the development of a novel de-icing product, Thawrox (I suppose that the name is a creative play on “Thawing Rocks.” Not sure they pulled it off). Thawrox combines normal Calcium Chloride with exotic plant sugars to produce a product that not only works at colder temperatures (to -15F compared to 10F for normal highway salt), but also sticks to the road better and is less corrosive than Calcium Chloride alone.

In the third quarter of 2009 leading up to the winter season, the sale of highway de-icing products comprised $1.53 Billion of the Compass’ $2.13 Billion total sales, representing 72% of the company’s sales. Obviously, CMP is quite leveraged in the de-icing business, and its profitability will likely be determined by how snowy the winter is. Thus, it makes an ideal weather play. A few reasons to consider investing in Compass Minerals:

1) Compass Minerals Is The Only Game In Town: CMP’s primary competition in the industry is Cargill (privately held) and Rohm and Haas (owned by Dow Chemical). Either highway salt is only a very small portion of the company’s overall business and thus does not represent a good direct play (R&H) or the company is too small to challenge CMP (Cargill)

2) Location, Location, Location: By its very nature, highway de-icing products have a very low value/weight ratio. In other words, calcium chloride is very cheap, but it is also very heavy. Thus, transportation costs significantly factor into profitability. Fortunately for Compass Minerals, its largest mines are in southern Canada adjacent to (or even beneath) Lakes Huron and Erie. Thus, not only is costly ground transport minimized or even eliminated due to the proximity of waterways, but the product is relatively near its largest markets (the Northeast and Midwest).

3) Most importantly, Mother Nature is cooperating: As has been stated one way or another in nearly all my posts this season, the winter of 2009-2010 is to be The Year of the Blizzard. Already, several major cities have exceeded their annual snowfall averages and are approaching all-time single season records.

With a new storm on the way,  many major cities can expect to break these records over the next week. Washington, DC and Philadelphia, Pa, which were nailed with 32 and 29 inches of snow, respectively, last weekend, are in line for yet another major storm system Tuesday and Wednesday. Unlike the last storm which was just a very potent southern storm, this one will make the turn north and become a full-fledged Nor’easter. New York City and Boston, both of which missed out on last weekend’s blockbuster, can expect to get into the action this time with upwards of a foot of snow expected.

Projected Snowfall Accumulations:

Washington, DC: 8-14″

Baltimore, MD: 12-18″

Philadelphia, PA: 14-20″

New York, NY: 9-15″

Boston, MA: 6-12″

For the more visually inclined, Figure 1 below shows my projections for the upcoming storm.

Figure 1: Projected snowfall totals for February 8-10, 2010.

Across all of the major cities on the east coast, the cost of snow removal is roughly $1 Million/inch, which includes both the cost of de-icing salt product and labor. Also remember, this is ON TOP of the two-to-three feet of snow that is currently on the ground…and in some areas, the streets. These two storms, coupled with the blizzard back in mid-December that brought an additional two feet of snow to the region, have drained the salt reserves of many of these cities and have likely jacked up demand for CMP’s products. Three storms of this magnitude in a single winter season in this densely populated region of the country is unprecedented in recorded history.

CMP Stock Price

CMP reached a 2-year high of $88 in June of 2008 during the Energy/Materials Bubble and bottomed at $36 during the subsequent bust. Compass reached a 52-week high the first week of 2010 at $74 and has since pulled back about 12% to $66. The stock also features a 2% dividend and a P/E ratio of 12.1x for those looking at a long-term hold.

I do not yet have a position in CMP, although I plan to initiate one shortly. I am usually very wary of buying based on a single event (upcoming snowstorm), but right now I feel that this storm is just continuing a winter-long trend. That being said, I would not be surprised to see a quick pullback should the weather quiet down next week. We have seen this happen with frequently with hurricanes and this past winter with Frozen Concentrated Orange Juice following a Florida Freeze.

Regards,

Dr. Cane