While winter weather so far in 2006 has been unfavorable for CMP, the dividend is 100% safe. Therefore, I think there is pretty strong support for the stock in the $22/share range, as the dividend yield hits 5.0%.
My analysis of the cash flow support for the dividend:
$140 MM (EBITDA floor = 2002 worst-case winter Salt EBITDA of $125 + current run rate Potash EBITDA of $35 + run rate corp of $(20))
$(26) MM cash interest (excludes PIK interest and includes $12 MM savings from recent bond refinancing)
$(40) MM 2006 budgeted capex
$(25) MM worst-case cash taxes with cash tax rate = book tax rate
$(35) MM dividend
$14 MM "excess" free cash flow = cushion before they would have to borrow money to pay the dividend
I'm sure management performed a similar analysis before they raised the dividend to that level in the first place, because they wanted to be 100% sure they would never have to cut the dividend.
There is probably up to another $10 MM of cushion that I have not taken credit for, as management has long said that they will reduce capex when they see a bad winter happening to conserve cash flow.
Furthermore, I have not taken credit for structural improvements CMP has realized in the underlying salt business since 2002 (mainly price and volume), which likely raise the salt EBITDA floor above $125 MM/year.
To back-up my claim that 2002 is worst-case for salt business, following are CMP's highway de-icing salt volumes since 1999: 1999 = 8.865 million tons, 2000 = 9.146, 2001 = 9.402, 2002 = 7.965, 2003 = 9.663, 2004 = 10.333.
Wish I'd sold at $26 to pick it up again at $22, but still worth holding onto for the long term. If the economy heads south, CMP should get alot of attention as a great defensive play (no correlation between global GDP and snowfall in US Midwest).
Given the solid cash flow cushion for the dividend, I am still holding out hope that management will use the recent interest savings to raise the dividend, but they probably play it safe given the crap winter we're having (from the sick perspective of CMP longs who pray for snow).
I did not. Thought I had note somewhere about EBITDA of this business, but can't find it. Fact that Ineos paid money for it would imply cash positive, but management comments in 3Q call about 50-55% operating rate would imply otherwise.
I don't think the dividend is in trouble either...BUT.
Q1 is by far their biggest in terms of cash flow from operations...and also for their net income.
So I don't think they will be starting of the year in a very good way...and unless there is a major pick-up in snowfall soon Q1 is going to be much worse than expected...and therefore they will probably miss eps numbers badly for the year...unless of course Q4 of 2006 is HUGE because of a bad winter later this year.
So, I think what you see here is people bailing b/c they think that Q4 2005 might not be good...and there is a very good possibility that Q1 guidance will be well below expectations. So with this being very likely...why wouldn't you sell ahead of the news...save some money...and then just buy back after the dip. You will still get the dividend if you buy back after...
just my opinion...for the record I have been short from $26...and I will cover in the high teens. I realize that CMP rarely gets that low, but at the same time we rarely ever have this type of winter...so I think it will go lower than normal.
My 2 cents would be that you made a great call with short at $26, but don't get greedy looking for high teens. Div yield at $20 is 5.5%, so my opinion is it will not fall below that level (100 bps over Treasuries w/ equity upside a pretty sweet deal in my book). Only way I see it breaking 20 is if it gets pushed close enough ahead of some news event (weak outlook in 4Q call or crap 1Q results) that prompts temporary downward spike. To reverse an old cliche - short on the rumor and cover on the news. I'd be ready to cover on Feb 14th release/conf call whereever it ends up. Worst case scenario should be priced in by then.
second_law_guy, thanks for this nice analysis. I have a question, maybe you could answer. When does the effect of mild winter weather show up on earnings of CMP? Does a mild winter decrease salt sales during that winter? Or does it show up the next year, when customers realize that they have leftover salt not used the previous year, and thus reduced need for the coming winter? Guess my real question is whether customers stockpile all they need before the winter, or continue to order in during the winter on an as-needed basis. Thanks for any help.
(1) you see results immediately (though you won't see in 4Q numbers CMP reports on Feb 14th, as they get boost of initial stocking by customers and the Dec snowfall was actually above average ... for back-up evidence, I would point you to Rohm & Haas reporting solid 4Q numbers for their Morton salt segment); and
(2) there is very little carryover effect to the next season.
Customers carry very little inventory (if you live in area where it snows, you can often see the small domes off the side of the highway) and replenish from larger regional stockpiles that CMP maintains. No snow, no orders and sales take hit immediately.
Ahead of the season, CMP has pre-stocked their regional storage hubs, but, for average winter, still needs to keep producing and shipping from the salt mines. If they see warm winter underway, they react and curtail production at the mine and stop/slow shipments to the regional hubs. This prevents building up an inventory bubble that carries over into the following winter. The only issue, which hits financials immediately, is absorbing the fixed costs of the mine. Even here, however, CMP has built-in buffers, as their labor contracts basically make labor a variable cost - they don't run the mine, workers don't get paid.