Morningstar | Summit Materials Continues to Struggle in 3Q; Cuts EBITDA Guidance Another 14%. See Updated Analyst Note from 07 Nov 2018
Summit Materials’ share price fell nearly 5% after the company reported third-quarter earnings. Although all building materials companies faced weather-related headwinds during the third quarter, Summit Materials struggled beyond wet conditions. We always preferred peers Vulcan’s and Martin Marietta’s geographic footprints and upstream focus, and these differences led to Summit’s comparatively worse quarter. Because Summit generates more of its business on downstream products, cost inflation hit it worse during the quarter. Although this probably can be recovered in subsequent quarters through price increases, it reflects the fact that upstream products hold the economic rent in the value chain.In addition, while we like that Summit has cement operations, its Midwest focus hurt it during the quarter as these states saw much weaker cement demand than previously anticipated.
As a result of these issues, although Summit's revenue grew 9% to $625 million, adjusted EBITDA remained roughly flat at $172 million as margin contracted 260 basis points. Given the continued struggles, Summit cut its full-year adjusted EBITDA guidance to $400 million-$410 million from $460 million-$480 million. We’ve updated our forecast for the latest guidance, which leads to a reduced longer-term outlook as we expect some delay before the company can raise prices to recover margin.
Our changes lead us to reduce our fair value estimate to $24.50 per share from $26.50 for narrow-moat Summit Materials. Given that the company now expects net leverage to reach 4.4 times by the end of the year, one full turn higher than the prior year, we’ve also raised our uncertainty rating to very high. Nevertheless, with the shares currently trading below $14, we do see risk-adjusted upside at this time.
For more details on our view of U.S. road construction, please see our report "Aggregates Stocks Are Priced for Growth--Do They Deserve It?"
Summit Materials is a holding company. Through its subsidiaries, the company is a construction materials company. The company produces and sells aggregates, cement, ready-mix concrete, asphalt paving mix and concrete products and owns and operates quarries, sand and gravel pits, cement plants, cement distribution terminals, ready-mix concrete plants, asphalt plants and landfill sites. The company is engaged in paving and related services. The company has operations in various states across the United States and in British Columbia, Canada. The company operates a municipal waste landfill in its East segment, and has construction and demolition debris landfills and liquid asphalt terminal operations in its West and East segments.
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