Welp, Barron’s this week beat me to it, but instead of focusing on the industry in aggregate (no pun intended) I will focus my post on Summit Materials, the aggregates, ready-mix, and cement player.
Summit has taken a beating this year and is down nearly 40% YTD. It’s been a challenging year due to weather and higher material costs which have pressured the company’s earnings. Q1 is a small quarter for the company, but consensus was calling for $11MM of EBITDA and SUM printed $5MM. Q2 is more important and consensus was calling for $150MM of EBITDA. SUM printed $135MM, about a 10% miss.
Then this week, the company posted this slide calling out more weather concerns for 2018.
Wichita makes up ~12% of company sales, Houston is ~10%, and the Mississippi river and the Carolina’s are also important regions for the company.
Essentially, when you look at the company’s EBITDA bridge, there seems to be a lot of risk related to the “2H Price / Volume Acceleration” the company is calling for.
While the company didn’t officially lower guidance, this deck basically does. It also called out cement pricing as more competitive, whereas on previous calls they’ve pointed to that being an area of growth for them.
All that being said, I think part of this is already priced into the stock. SUM was down another 8% or so when this deck came out. Also, consensus already lowered estimates to ~$460MM, so they are already saying results will come in below guidance.
I should also say that Aggregates companies are great businesses. They literally sell rocks used for residential, commercial, and infrastructure construction. You can’t ship rocks very far so that creates opportunities for limited competition (e.g. China isn’t going to be a low-cost rock producer and ship them into the US). Also, the quarries where these aggregates are pulled from need to be nearby where the construction is occurring, but far enough away due to NIMBY issues (Not in my back yard!). That creates regional oligopolies for producers and gives strong pricing power.
When you look at the comps, Vulcan and Martin Marrietta have historically traded at well over 10x EBITDA. Which is why I was shocked to learn the SUM trades at 6.5x consensus 2020 estimates!
Fine, consensus estimates need to come down in the short-term, but over the next 3 years, the fundamentals still look favorable for building products companies. I just made a post about different case studies of when the market is too short sighted and I think this is another case of that.
So I am going to haircut 2018 estimates even more, but I still believe there is demand for the work. So while it will be delayed, it’s not business gone forever. One other thing I should mention is that SUM is a roll-up — it acquires smaller aggregates producers for attractive prices and bolts them on to their network. Because Summit is so acquisitive and since they just issued a bond recently to prefund acquisitions, I do include acquisitions in my assumptions, which is consistent with the street.
As you can see, even with my lower estimates, Summit is too cheap to ignore trading at < 6.5x.
For conservatism, let’s say SUM should trade at 10x (you could argue 12x due to where comps are trading). I see over 115% upside to current levels.