U.S. Concrete (USCR) is situated in the top position of each major market where they supply Ready-Mix and Aggregate concrete supplies. USCR currently services the fastest growing residential, commercial, and infrastructural real estate markets in the U.S. They provide their patented quick drying and eco-friendly mix of concrete to markets such as New York City, Dallas-Fort Worth, and the San Francisco Bay area. U.S. Concrete has agreed to contracts with high-margin commercial companies such as Google (NASDAQ:GOOG), FaceBook (NASDAQ:FB), and Toyota (NYSE:TM), as well as LaGuardia International Airport. Their current strategy of organic and acquisition growth, combined with their high-profile project outlay, shows that USCR has positioned itself for major growth as 2018 approaches. Using my pro forma valuation, the one-year price target is just under $105.
Recent Earnings Performance
U.S. Concrete currently sits slightly above the trends of the Construction Materials and Products Sector Index. However, that does not tell the whole story. I am not suggesting that readers buy the index; rather, I’m suggesting a buy that, within the year, will outperform the index significantly. Despite a dip in Q3 performance due to two major acquisitions, inclement weather, and the effects of three major Hurricanes, USCR was able to increase consolidated revenue 7.9% year over year, to $354.6M. Total revenue increased 18% to $1.313B, and the total adjusted EBITDA increased 1.3% to $54.7M.
The reason behind USCR’s success is the position they hold in the fastest growing commercial, residential and industrial real estate markets in the country. USCR has agreed to be the top supplier to commercial projects with high margins, such as Facebook Data Center in Fort Worth, LaGuardia Airport in Queens, and Google’s Bayview Campus in Mountain View, Calif. Due to these contracts and the positive outlook the industrial sector has seen under the Trump administration, there is an extremely positive attitude for current and future revenue and margin growth.
U.S. Concrete is well positioned in the construction products industry because of the markets that they currently serve. USCR is an industry-leading ready-mixed concrete and aggregate supplier in the New York metropolitan, Dallas Fort Worth, and San Francisco markets. These three metropolitan areas are some of the fastest growing industrial and residential areas in the country. Due to USCR’s specific regional dominance, they have a large competitive advantage in their industry.
Additionally, USCR has the ability to provide a superior ready-mixed concrete that uses their EF and Aridus Technology to allow a stronger, quicker drying, and eco-friendly product. Because USCR offers a superior product than its competitors, they have the ability to sell their ready-mixed concrete at a premium price of $136.62 per cubic yard vs. the industry average of $107.17.
Source: USCR Investor Presentation Slides
U.S. Concrete has utilized vertical integration approach in order to increase their margins and return on capital. Although they are second to Vulcan Materials (VMC) in aggregate ownership, USCR’s recent acquisitions have allowed them to increase their internal aggregate sourcing, helping to reduce costs and improve margins.
U.S. Concrete focuses on two key segments, Ready-Mix Concrete and Aggregate supplies. USCR’s Ready-Mix segment has seen its 26th straight quarter of year over year growth, and its backlog has grown 7.7% since the beginning of 2017. The outlook for Ready-Mix is extremely positive considering that the construction spending is estimated to outpace the national average for the next 18 months in San Francisco, Dallas-Ft. Worth, and the five boroughs of New York. Compared to 2016 the Ready-Mix sales volume has grown 13.9% to 8.91 million cubic yards. The Ready-Mix segment should see continued growth due to their market position in the New York Metro area that has just passed a $32 billion budget to increase infrastructure spending that highlights U.S. Concrete as the main Ready-Mix supplier.
Currently, USCR is the main supplier for World Trade Center Construction (400,000 cubic yards), Hudson Yards (375,000 cubic yards), LaGuardia Airport (375,000 cubic yards), the Goethals Bridge (80,000 cubic yards), the Tappan Zee Bridge (~45,000 cubic yards), and the Bayonne Bridge (40,000 cubic yards). The Aggregate segment took a bit of a dip in 2017 due to the inclement weather and three major hurricanes that shut down a quarry. It was expected that sales volume would decrease, and it did by 5.8% in quarter three. However, the rise in Aggregate price by 2.7% to $12.25 somewhat offset the dip in sales. Overall, the year over year revenue increased 18% to $1.313B despite the shortcomings in Aggregates.
U.S. Concrete is constantly looking for ways to expand their robust plant layout. They are no strangers to acquisitions, and have recently locked in a deal with Polaris Materials located in British Columbia to be approved on Nov. 15th. USCR also acquired Action Supply located in Philadelphia, which has the potential to infiltrate a new market, but really offers the ability to synergize their recently acquired Corbett Aggregates Companies in New Jersey.
The main focus for their acquisitions are companies that produce Aggregates. Aggregates provide roughly 6.5% of revenue, but allow USCR to vertically integrate their internal production. The ability to vertically integrate allows USCR to reduce costs by limiting the need to purchase from the open market. USCR currently sources roughly 1/3 of their Aggregates internally, but the acquisition of Polaris is estimated to increase their Aggregate production significantly. Estimates project the ability to produce nearly double the amount of internal Aggregate sourcing.
CEO Bill Sandbrook said that the Polaris deal will provide the company with more Aggregate reserves that will help the company’s strategic operations in northern California markets. Additionally, Polaris currently operates in Long Beach, Calif., which could potentially allow U.S. Concrete to expand into the Los Angles market. USCR is able to finance their acquisitions through long-term debt. The book value of long-term debt is $688.4M, and $610.3M is due in 2024. However, due to the organic acquisitions, the steady increase in revenues and the limitation of costs, long-term debt is not a significant liability.
Although U.S. Concrete might be small in regard to market capitalization when compared to its competitors, they make up for it in the contracts that they have with large commercial companies, as well as the markets in which they operate. USCR significantly beats their competitors in return on equity and return on assets, due to their contracts with high margin companies. Their adjusted EBITDA is steadily growing, but is limited due to their acquisition costs that they finance in part by revenue (the majority is long-term debt). Considering USCR’s market capitalization is much smaller than its nearest competitor, their EBITDA is comparable to the median in terms of size.
USCR’s gross margin is slightly below the median, however this should rise as the budget for spending in the New York Metro area has been set at $32B over the next 10 years. Most importantly, USCR’s revenue is slightly below the median; however, it is greater than Ash Grove Cement Co., and is slightly trailing Summit Materials (SUM). Both of these competitors are nearly three times the size of USCR, but generate comparable revenues. It is important to consider the types of projects that USCR is undertaking as well as the projects in their backlog.
Along with it’s competitors, USCR is concerned with the volatility of oil prices as well as the uncertainty of Trump’s $1 trillion infrastructure spending executive order. USCR is also faced with paying off short-term liabilities that might put a stress on their cash on hand. However, with their recent acquisition and revenue growth, there shouldn’t be an overexaggerated concern here.
USCR is well-positioned in their primary markets of New York Metro, Dallas-Fort Worth, and San Francisco Bay. USCR has constantly managed to grow its revenue and number of high margin projects because of their organic and acquisition growth strategy. USCR will continue to benefit from an increase in infrastructure spending while decreasing their costs by improving vertical integration. They have industry-leading return on assets and return on equity, although they have the smallest capital expenditure compared to competitors. I believe that a one-year target return of 22% is extremely achievable for USCR.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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