Maintaining $78 FVE as Compass Announces Additional Fertilizer Divestitures
by Seth Goldstein, CFA | Morningstar Research Services LLC | 04-08-21

On April 8, Compass Minerals announced that it had reached an agreement to sell its North American micronutrients businesses to Koch Industries for $60.25 million. The deal is targeted to close by the end of the second quarter of 2021, which we think is a reasonable timeline. While Compass does not disclose micronutrient volumes within its plant nutrition North America segment, we estimate that these fertilizers accounted for less than 10% of total segment volumes. We think Compass received a fair price for the assets. After updating our model to incorporate the deal, we maintain our $78 per share fair value estimate and wide moat rating.

At current prices, we view Compass as undervalued, with shares trading in 4-star territory. We point to higher near-term salt profits, from higher prices and lower unit production costs, as a near-term catalyst for shares. The current bidding season for highway deicing salt has just begun. With average winter weather and the shutdown of a competitor's salt mine, we expect deicing salt prices will rise as demand outpaces supply. Additionally, as Compass continues to improve production at the low-cost Goderich mine, we expect unit production costs will fall. Higher prices and lower costs should boost profits starting in the fourth quarter of 2021.

The North American micronutrient businesses include premium products such as Wolf Trax. Once the deal closes, Compass' North American business will sell nearly all sulfate of potash, or SOP. While we view the deal as value-neutral, we are in favor of the move from a strategic standpoint. Compass' best assets are its low-cost salt mines and its low-cost SOP operation at Ogden, which underpin our wide moat rating. As such, we think management is smart to divest noncore assets as a way to pay down debt and restore the balance sheet. Further, the focus on optimizing the salt business and growing SOP volumes over time should provide value-accretive organic growth opportunities in the future.

Biden's Infrastructure Plan Would Benefit FirstEnergy's Transmission Investment
by Charles Fishman, CFA | Morningstar Research Services LLC | 04-06-21

We are reaffirming our $42 fair value estimate for FirstEnergy after President Joe Biden announced a $2.3 trillion infrastructure investment plan. Biden's proposal calls for $100 billion to upgrade and expand the U.S. transmission system. However, passage of the plan could be challenging with Democrats holding only small majorities in the U.S. House and Senate. Even if Biden is unsuccessful in advancing his infrastructure plan, we believe the administration's focus on infrastructure will bolster FirstEnergy's transmission investment.

Although the market has fixated on the political bribery scandal in Ohio, we estimate Ohio state-regulated distribution system earnings will contribute less than 20% of FirstEnergy's consolidated earnings in 2021. The company's transmission segment, regulated by the Federal Energy Regulatory Commission, is expected to contribute over 28% of 2021 earnings.

We forecast that FirstEnergy's "Energizing the Future" program, focused on its transmission businesses, will receive 42%, or $6.6 billion, of the $15.7 billion companywide planned capital expenditures over the next five years. We estimate the larger percentage of future transmission investment relative to current consolidated earnings contribution will drive earnings from the transmission segment to 31% of operating earnings by 2025.

In February, a settlement was reached that would move the JCP&L transmission system under FERC jurisdiction from New Jersey state regulation. JCP&L's $1.1 billion of rate base, about 12% of FirstEnergy's total transmission rate base, was the only remaining state-regulated transmission system. By 2023, 100% of FirstEnergy's transmission rate base will be regulated under FERC formula rates. This ratemaking framework is more investor-friendly than typical state regulation, which requires a utility to invest capital ahead of customer rate adjustments to collect a return on and return of that capital.

The U.S. Repair and Remodel Market Is Poised for Long-Term Growth
by Brian Bernard, CFA, CPA, and Jaime M. Katz, CFA | Morningstar Research Services LLC | 04-05-21

Home improvement spending during pandemic-stricken 2020 was atypical in two respects. First, households spent more time at home and allowed fewer contractors to enter homes (due in part to social distancing practices), causing a surge in do-it-yourself projects. Second, despite the pandemic-induced economic downturn, improvement spending increased across most product categories. Typically, demand for higher-priced discretionary products (for example, cabinets) wanes during a recession, but the combination of government stimulus, fewer discretionary spending outlets, and more time spent at home caused improvement spending to buck the historical trend in 2020.

In our view, the swell of DIY spending in 2020 likely pulled forward some future demand, and we expect to see DIY normalize in 2021. However, we think pent-up demand for professional projects will begin to release this year, and as such, a resurgence of higher-ticket do-it-for-me projects should more than offset weaker DIY spending. Overall, we expect repair and remodel spending growth will moderate but remain positive in 2021, then strengthen thereafter. Over the short term, the release of pent-up DIFM demand and deployment of additional government stimulus and household savings should support elevated spending. However, the R&R market should also benefit from several long-term secular growth tailwinds, including aging housing stock, favorable demographics, and increased acceptance of smart home and energy-efficient products and solutions. We also believe a greater national focus on addressing racial inequality could help boost minority household income and homeownership rates, which could support further repair and remodel spending.

Our base-case forecast projects R&R spending to expand at a 4.6% 10-year compound annual growth rate, reaching a $660 billion addressable market in 2030. We project owner-occupied R&R growth (4.7%) will outpace rental R&R growth (3.7%) over the next 10 years.

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