Compass Minerals Announces Production Improvements at Goderich; Shares Remain Materially Undervalued
by Seth Goldstein, CFA | Morningstar Research Services LLC | 01-09-19

Compass Minerals announced 2018 fourth-quarter snow data and provided general guidance on fourth-quarter salt sales volumes. However, our key takeaway from the update was management's commentary that the company was able to improve production at the low-cost Goderich mine. This news is in line with our thesis that the company will be able to fully ramp up production at Goderich and implement the new continuous miners throughout the mine to restore profitability. While management only provided directional commentary, we are encouraged by the announcement and expect more details during the company's fourth-quarter earnings call that is scheduled for Feb. 12.

With our long-term outlook intact, we maintain our $81 per share fair value estimate for Compass Minerals. Our wide moat rating based on the company's cost advantaged salt production is also unchanged. At current prices around $44 per share, we see over 80% upside relative to our $81 per share fair value estimate.

We think the market is taking an overly pessimistic view of Compass' long-term profitability, likely stemming from the company's recent operational issues that have limited production at the Goderich mine due to the implementation of continuous mining equipment. We continue to liken this transition to starting up a new mine, where Compass faces a temporary learning curve while making the full transition to continuous mining. However, we ultimately expect the Goderich mine operation will be fully restored and forecast unit production expenses will fall nearly 10% by 2020 from 2017 levels.

Verizon Posts Strong Initial 4Q Wireless Numbers
by Michael Hodel, CFA | Morningstar Research Services LLC | 01-08-19

Speaking at an investor conference Jan. 8, Verizon disclosed that it added 1.2 million net new postpaid wireless customers during the fourth quarter, including 650,000 postpaid phone net additions with monthly postpaid phone customer churn of 0.82%. That phone figure is the strongest in four years, despite a continued gradual increase in the pace of customer defections seen throughout 2018. Verizon shares are up nearly 3% on this announcement; we don't plan to change our fair value estimate, leaving the stock roughly fairly valued. We continue to view Verizon as a narrow-moat firm thanks to the scale and strength of its wireless business.

The wireless industry has seen the pace of postpaid phone customer growth accelerate, a trend that Verizon Wireless CEO Ronan Dunne ascribed to increased engagement through things like wearable technology, migration from prepaid plans, and increasing penetration at both ends of the customer age spectrum. Offsetting this trend, however, both Comcast and Charter are now marketing their wireless services and are taking retail market share. Dunne indicated that Verizon is losing less than its fair share of customers to these entrants, who also use the Verizon network to serve their customers. We suspect Verizon's phone customer additions roughly matched T-Mobile's during the quarter, with Sprint and AT&T struggling to expand their respective customer bases.

Verizon also provided an update on its 5G trials, claiming that customers are receiving nearly 1 gigabit-per-second speeds (versus promised 300 megabits per second) using only 40% of the firm's available millimeter wave spectrum. While interesting, we're hesitant to draw any conclusions given the early stage of this effort. It will take time for the networks to fill with customers and truly be put to the test.

More Positives, Less Negatives Likely for Wells Fargo in 2019
by Eric Compton | Morningstar Research Services LLC | 01-09-19

Wells Fargo is one of our top banking picks entering 2019, as the bank is currently trading at one of the highest risk adjusted discounts to our fair value estimate among the U.S. money center and regional banks. We believe shares are worth $67, which is 13.5 times our 2019 earnings estimate and 2.1 times tangible book value as of September 2018.

Wells recently came to a settlement with the Attorneys General of all 50 states (as well as the District of Columbia) in regards to many of the already disclosed issues the bank is facing. This settlement covered the fake accounts sales practices, the unnecessary auto insurance issues, and the mortgage rate lock issues. The bank agreed to pay a total of $575 million to resolve the civil claims related to these. Wells had already accrued $400 million for these items, meaning an additional $175 million would be needed in its fourth-quarter earnings. We note that Wells had already been fined by regulators for these issues, therefore we would expect much, if not all of the liabilities resulting from these specific items to be closed.

Overall, we believe this is how 2019 will play out for Wells Fargo, as the bank settles outstanding items and puts much of the last three years in the rear view mirror. As the news cycle runs out of new negative items to report, the bank increasingly puts old issues behind it, and more normal levels of profitability return to the bank, we would not be surprised to see sentiment change over time. The next big item we expect an update on would be progress on getting the asset cap lifted.

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