Morningstar Magazine - October/November 2017 - 25

advantages in the form of economic benefits
derived from control over new assets and revenue.
The merger also highlights our view that the
industry has long been undermanaged, guilty of
favoring technological expertise and showcase
project development over operating efficiency and
optimized networks. We believe applying
Praxair's proven operating and capital-allocation
strategies can wring even greater synergy
benefits and cost reductions over time from the
sprawl of a combined $60 billion asset base.
We anticipate required divestments from a merged
Praxair-Linde could represent annual revenue
of $1 billion to $2 billion and $3 billion to $8 billion
in market value, respectively. Air Products, the
smallest of the Big Four industrial gas companies,
seems well positioned to pounce. Initially, it
may be the company with the most dry powder
that captures the best assets. Later, it may benefit
from customers' and regulators' preference for
greater supplier diversity and regional competition.
The oligopolistic industrial gas industry supplies
oxygen, nitrogen, argon, and hydrogen to
petroleum producers and refiners, steelmakers,
glassmakers, chemical makers, chipmakers, food
processors, and dozens of other industries.
The largest suppliers have exposure to mature and
well-developed markets that offer attractive
economics, but suboptimal management
of production and marketing assets means their
profitability has lagged what we believe is
its natural level. As a result, our industry models
reflect the expectation that each global major
will be able to steadily improve operating margins
and returns on capital in coming years.
The proposed merger is driven by the highly
complementary nature of the strengths,
needs, and priorities of the two companies, in
our view, as well as the evolving basis of industry
competition. Smaller, higher-performing
Praxair wants to accelerate its plans to achieve a
broader geographic footprint and gain greater
exposure to faster-growth emerging economies,
as well as tap into the engineering breadth
and innovation that Linde offers. With roughly
twice the revenue and gross assets of
Praxair, Linde requires the updated operating

TRE NDS

Climate Change Affecting Compass Minerals
Shares of Compass Minerals CMP have fallen
20% since the company reported a second
consecutive year of poor salt results in February.
Compass' deicing salt sales are tied to the
number of days it snows at least 1 inch in cities
across the company's footprint. The past two
winters had far fewer snow days than normal
(around 15% below average), depressing
Compass' results and share price. At the end
of August, shares traded at a seven-year low,
implying a future that looks much like the recent
past: warm winters, weak salt demand, and
depressed profits.
Has climate change impaired Compass Minerals'
franchise? Our analysis of 120 years of weather
data across Compass Minerals' 10 key
markets suggests climate change is to blame for
recent weakness, but only in the sense that it
has increased weather volatility. Over the
past two decades, Compass Minerals' footprint
had both the greatest number of snow days

and the second fewest as any time in the past
120 years. In fact, the "normal" winter isn't much
warmer than 20 years ago.
Warming is likely to continue, and we estimate
a normal winter will bring 4% fewer snow
days a decade from now. In the near term,
however, a bounce back in snowfall, salt demand,
and profits is more likely than not. The data
strongly suggest reversion to the mean is
likely in coming winters. Compass' salt profits
should improve considerably, buoying
shares. The timing of the recovery is hard to say,
but thanks to low-cost assets-the basis
for our wide-moat rating-Compass Minerals
can endure some "bad" years. Winter is
coming, and with over 25% upside, the stock is
significantly undervalued relative to our fair
value estimate of $85.
Seth Goldstein, CFA, is an equity analyst with Morningstar
Research Services.

Climate Change Has Increased Weather Volatility, but the Average Winter Isn't Less Snowy

Total Number of Snow Days in Compass Minerals' 10 Key Markets, 1900-2016
Number of Snow Days

Linear (Number of Snow Days)

Rolling 10-Year Average

Days
225

Greatest Number of Snow Days on Record
200

175
150

125

100
Second Fewest Number of Snow Days
75
1900

1920

1940

1960

1980

2000

'16

Source: Morningstar, National Weather Service.

25

Number of Snow Days

Linear (Number of Snow Days)

Rolling 10-Year Average
Table of Contents for the Digital Edition of Morningstar Magazine - October/November 2017
