Cover story (July 6) about some firm with supposedly a good record on shorting stocks, list 5 of their best ideas for shorting. 1 of them is CMP, with a $ 12 price target.
Their basic points seem to be (1) potash prices are artificially high, considering what's happened to other fertilizer prices, and farmers can delay the use of potash, and (2) unless we have another bad winter in the midwest, states and local governments' financial problems will cut demand for salt.
They are supposed to have a good track record fro shorts (bad for me since I own 2 stocks on their lists, CMP and LANC which didn't make the top 5, but made a dangerous watch list). But I don't understand what passes for analysis at the company. They say that de-icing salt accounts for 55% of operating profit, but if you look at the last 3 years, salt accounts for way more than 55%, even in 2008 when potash prices went crazy. Maybe they have access to a breakdown between de-icing and other salt sales, but without some explanation, I wonder about their research. I read it as recommending a short based on a projection of a milder winter, which seems crazy to me.
Also, they talk about potash prices, but don't mention that CMP sells specialty potash, with different crop uses than potash. Again, maybe there's more detail in whatever report they issued, but not in the story.
I do not know how you came to that conclusion. They clearly said they anticipate lower buying because local governements have budget shortfalls. They definitely have a point there. Governments will probalby look closely at their inventory before just buying what they did in previous years. This could hurt sells.
"I read it as recommending a short based on a projection of a milder winter, which seems crazy to me."
My points: 1. State and local governments don't have a choice when it comes to de-icing. Their potential legal liability for failing to de-ice in case of bad weather would far outwiegh the cost of rock salt, so they do it, and then figure out how to pay for it. Several localities complained last year (I'm most familiar with NY) that they had to cut other parts of the budget in order to pay for de-icing, but they had no choice. And by the way, I think that the cost to apply the rock salt (or other de-icer) is greater than the cost of the salt itself. So I don't think demand will fall much based on government's ability to pay. They can (and will) always raise taxes.
2. I don't think localities stock pile all that much salt. In the winter of 2007/2008, when the weather was really bad in CMP's midwestern area, sales took off without regard to price increases that were imposed. So I don't think localities had much stock piled. And with most localities' finances, I doubt they are stock piling much now. (And this last part is a serious question - how/where do you stock pile rock salt so that it doesn't get wet and melt?)
But I could easily be wrong. I just think that someone who thinks the business will get so bad that the price drops to $ 12, which last happened in early 2004 when EPS was $ 1.00 (the 2003 EPS) or $ 1.50 (the 2004 EPS) must be counting on global warming in a big way.
A bigger concern, and one I would have respected more, is the environmental impact of rock salt leading to replacement chemicals. I read that Canada wants to classify rock salt as a toxic material, whcih can't be good for business. Then, I could understand the $ 12 price target.
whether or not upcoming sales are somewhat higher or somewhat lower -- or whether SOP or salt orders are deferred for a period -- doesn't really capture why a $55 dollar stock should fall to $12. The current price is backed by current real, actual cash flows, this isn't some speculative company, so if someone is predicting $12 they must be forecasting a permanent impairment of a substantial part of CMP's current business. I'd like to see what numbers they're using to come up with $12. Regardless of how tough the coming year might be, I don't think they've permenantly repealed either winter or hunger.
What a crock Barron's and their stories are.....the news of this coming story probably caused the violatility in this stock last week...acted that way. Can you imagine the level of the dividend if this stock fell as Barron's suggests! Seems like half of Wall street is a crock!
It looks like the stock has dropped pretty strongly (down 15%) in a market that has been very strong to the upside since this article earlier in the month.
I don't know about a $12 price target but the low to mid $40's is not out of the question near term before any short interest builds up enough to trigger short covering.
I really like Barron's but I mostly disagree with their assessment of CMP's future. Basically their argument is that, if you assume that salt prices drop dramatically and the SOP market doesn't ever recover then this company is a great short. If you agree with this then by all means sell your CMP stock asap (or short it.)
If you are interested in learning the facts/data about CMP then be sure to read their most recent investor presentation (6/3/09):
Some highlights include:
regarding their SALT segment
"Do not SALT
expect current economic climate to materially impact highway deicing demand
– ~50% of 2009-2010 North American bid season is completed
– Bid prices more than double long-term average increase of 4% per year."
Regarding their SOP segment
"2Q 2009 demand remains relatively weak
2009 expect modest sequential demand strengthening
Expect demand improvement toward more-normal annual growth rates during 2010
Pricing should remain attractive throughout 2009 and beyond."
Furthermore they are taking steps to aggressively deleverage their balance sheet and continue to make strides in expansion of their less cyclical consumer and industrial segments.
Also of note S&P has this stock rate a Buy with a 12 month target price of $65 and Morningstar has 5 star/consider buy rating with a Fair value of $85.
Please do your own research if you are considering buying this stock.