Morningstar | U.S. Concrete Faced a Challenging 2018 Due to Weather but Should See Growth in 2019
In 2018, adjusted EBITDA grew nearly 1% to $194 million, as margins contracted 30 basis points to 12.5%. Most growth came through acquisition, as organic growth was weighed on by weather that plagued construction activity throughout the year. For 2019, the company expects revenue growth of 5% and adjusted EBITDA growth of 11%. Management’s guidance is based on similar weather conditions as this year, so we think these targets are achievable if not beatable given how challenging weather already was in 2018.We’ve updated our forecast based on the company’s 2019 guidance, including $40 million of acquisition spending related to contingent payments to prior acquisitions and additional reserves. In addition, we’ve increased our capital spending forecast. These higher outflows are the primary drivers that lead us to cut our fair value estimate to $65 per share from $70. As most profits continue to be generated by the concrete business, our no-moat rating remains unchanged.
With shares trading at roughly $40 per share, we see significant risk-adjusted upside. In the last year, shares have fallen from nearly $70 per share, at one point dipping below $30, due to fears of a coming construction slowdown.
U.S. Concrete has higher exposure to nonresidential construction, which tends to be more sensitive to economic cycles, than the other companies in our heavyside building materials coverage. Meager 2018 organic growth likely stoked market fears, though the slowdown was primarily weather related.
Our fair value estimate is based on concrete volume growth of roughly 4% per year and price increase of 2% per year--a meaningful slowdown from recent years. We forecast companywide adjusted EBITDA margin expansion of roughly 160 basis points over the next five years--primarily driven by gains in the recently expanded aggregates business. Put simply, we think the market is pricing in nearly no growth, which we view as unsubstantiated pessimism at this point.
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?"
U.S. Concrete is a holding company. Through its subsidiaries, the company is engaged as a producer of ready-mixed and as a supplier of aggregates. The company's products comprised of: ready-mixed concrete, which products consist of proportioned mixes it produces and delivers in an unhardened plastic state for placement and shaping into designed forms at the job site; aggregates products, which sells these aggregates for use in commercial, industrial and public works projects in the markets they serve; and other, which includes the company's building materials stores, hauling operations, aggregates distribution terminals, a recycled aggregates operation and concrete blocks.
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