EUR 850.00 For Business Accounts Only

Morningstar | U.S. Concrete Starts 2019 Slow but Shows Signs of Strong Underlying Demand; Shares Undervalued

U.S. Concrete had a slow start to the year, with revenue growing just 1.6% year over year to $333 million and adjusted EBITDA falling 4% to $34.5 million. Adverse weather impacted deliveries, particularly weighing on the concrete business. However, we see the year-over-year price increases of 2% in concrete and 11% aggregates as positive indicators that underlying demand remains strong despite the weather.

U.S. Concrete reaffirmed its 2019 guidance for $1.51 billion to $1.65 billion of revenue and $205 million to $225 million of adjusted EBITDA. 2019 has started off a bit slow due to weather challenges, but we think the company can still meet its guidance. Our longer-term forecast is largely unchanged, as we continue to think the company will benefit from increased infrastructure construction activity. However, we also continue to believe that U.S. Concrete’s lower infrastructure exposure relative to peers and its focus on concrete will lead to comparatively milder top-line growth and margin expansion. Having updated our model to reflect first-quarter results, we maintain our fair value estimate of $65 per share and no-moat rating.

Year to date in 2019, U.S. Concrete shares have risen nearly 35%, slightly above its peers. However, during 2018, U.S. Concrete, along with Summit Materials, dropped roughly 60%, compared with the milder 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 U.S. Concrete 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 U.S. Concrete shares with shares trading at roughly $47 per share.

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."