Morningstar | Summit's Dismal 2Q Points to Gloomier Long-Term Outlook; Cutting FVE by 16%. See Updated Analyst Note from 01 Aug 2018
Summit Materials’ second quarter was disappointing. Although revenue grew 15% to $549 million, most of this was fueled by acquisition. Organic volume growth was just 2% for aggregates and fell nearly 5% for cement. Organic pricing growth was lacking as well, with cement prices up just 2%. In addition, variable production costs spiked unexpectedly and Summit’s Houston operations saw a slow start to the construction season. As a result, despite double-digit revenue growth, adjusted EBITDA was flat year over year at $135 million, driving a 370-basis-point margin decline to 24.6%.Although we expect a recovery in the second half, the company cut its full-year adjusted EBITDA guidance to $460 million-$480 million from $495 million-$515 million. We’ve lowered our 2018 outlook accordingly. Furthermore, we’ve cut our longer-term outlook; we now expect adjusted EBITDA margin of 26% by 2022, down from 29% in our prior forecast. As a result, we’ve reduced our fair value estimate for narrow-moat Summit by 16%, to $27 per share from $32.
Although it hasn’t been a great second quarter for any U.S. building materials companies thus far, Summit’s results were especially weak. In particular, Summit’s organic growth was notably lower than its peers'. The company’s acquisition-focused strategy is the only reason it reported similar revenue growth. Even more disconcerting was the fact that neither Martin Marietta nor Vulcan Materials saw as dramatic a decline in profit margins as Summit. Although Summit’s shares look undervalued to us because of our bullish outlook for U.S. construction activity, we see better risk-adjusted upside in Martin Marietta 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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