EUR 850.00 For Business Accounts Only

Morningstar | Despite 10% Stock Price Jump and Our FVE Cut, U.S. Concrete Shares Still Undervalued After Solid 2Q

Before U.S. Concrete’s second-quarter earnings release on Aug. 7, its share price had fallen nearly 50% year to date. This decline was larger than any other U.S.-focused building materials company, with Martin Marietta down less than 10%, Vulcan down about 12%, and Summit down about 35%. Though U.S. Concrete faced some weather-related headwinds during the first quarter, we saw little justification for its significant price decline in absolute terms or relative to its peers.

Second-quarter earnings confirmed our belief, with shares up 10% as we write, driven by improved performance from the first quarter. Compared with organic revenue growth of just 2% for ready-mixed concrete in the first quarter, second-quarter growth was nearly 5%, with acquisitions adding another 9%. Aggregates looked even better, with organic volume growth of 10% and acquired growth of nearly 90%. In turn, higher volumes offset lower prices mainly stemming from a mix shift. Overall, the company generated a 19% year-over-year increase in revenue to $404 million and a 9% increase in adjusted EBITDA to $58 million. Adjusted EBITDA margins contracted about 120 basis points from the prior-year period to 14.3%, but this was mainly due to a mix shift and higher input costs that should be passed on via price increases in subsequent quarters.

Although our outlook for the legacy business is unchanged, we’ve adjusted our assumptions for the recently acquired Polaris operations.  Our updated outlook more accurately reflects the impact of Polaris' lower-priced and lower-margin tons on our long-term forecast.  As a result, our midcycle adjusted EBITDA margin assumption contracts by roughly 110 basis points to 15.6%. Accordingly, our fair value estimate falls to $75 per share from $85 for no-moat U.S. Concrete. Nevertheless, we still see shares as undervalued. Shares traded this high as recently as February, with the more recent share price decline unwarranted, in our view.

Aside from encouraging results in the second quarter, the positive stock price reaction was also driven by U.S. Concrete’s first full-year guidance target announcement, which provided a more positive growth outlook than the first quarter may have suggested. U.S. Concrete expects to generate full-year revenue of $1.52 billion to $1.62 billion and adjusted EBITDA of $215 million to $232 million. This would represent 18% revenue growth and 16% adjusted EBITDA growth from 2017.

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?”