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Morningstar | Slow Start to Summit’s 2018, but Underlying Demand Looks Strong; Shares Look Undervalued

Summit had a slightly slow start to 2019, but we think underlying demand remains strong. The first quarter tends to be the smallest contributor to the year given the seasonality of the business--it was only 1% of full-year 2018’s adjusted EBITDA. The company reported adjusted EBITDA of $6.6 million, 19% higher than the prior-year quarter.

Results were driven by strong volume and pricing growth in aggregates and asphalt but held back by weakness in cement. Cement’s results were challenged by river flooding and extended maintenance shutdowns. Given the strong organic volume growth and the mid-single-digit price increases of the other materials, we think underlying construction demand is strong. Cement results will benefit from construction demand as well, especially as operations normalize.

The company maintained its full-year guidance of adjusted EBITDA of $430 million to $470 million, which we see as achievable. We’ve maintained our fair value estimate of $23.50 per share for narrow-moat Summit.

Year to date in 2019, Summit shares have risen roughly 30%, roughly in line with its peers. However, during 2018, Summit, along with U.S. Concrete, dropped by more than 60%, compared with the mid-20 percentage declines of Martin Marietta and Vulcan Materials. We contended that 2018’s share price decline and the market’s fears of slowing construction activity were unwarranted given strong underlying demand. That has proven to be true so far in 2019. However, we think Summit hasn’t regained all its lost value, as the market continues to discount it more than some of its peers. Whereas Martin Marietta and Vulcan Materials look fairly valued on a risk adjusted basis, we continue to see upside in Summit shares.

Separately, on April 30, Democratic congressional leaders met with President Trump and agreed to aim for a $2 trillion infrastructure package. However, the source of funding has always been the challenge, and the meeting did not focus on how to pay for the potential deal. Although we think today’s political environment is favorable, we need to see more progress and details on funding before we're convinced the plan will come to fruition as proposed.

For more details on why we think today’s political environment is favorable for improved infrastructure funding, please see our report, "U.S. Infrastructure Spending Outlook Boosted by Midterm Elections."