Summit: Solid Play on Concrete

05/15/2017 2:50 am EST


Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

Summit: Solid Play on Concrete

While there’s an obsession about any piece of news relating to a possible infrastructure bill in Washington, D.C. this year, the fact is that construction activity is already strong around the country, and there’s no more basic way to play it than with concrete and aggregates, asserts Mike Cintolo, editor of Cabot Top Ten Trader.

That’s the business Summit Materials (SUM) is in, and demand appears to be picking up. It just reported that Q1 revenue was up 25%, though the bottom line was solidly in the red.

However, red ink in the first quarter isn’t unusual for Summit, and we note that the company has been able (and should continue) to deliver positive earnings on an annual basis. Sales in all segments— aggregates, cement and products—were up.

One of the themes in the industry is consolidation, and Summit is right in the mix; it’s acquired six companies year-to-date, says it has 20 more under review, and four more that are in late-stage due diligence.

Summit has a good deal of exposure to public infrastructure (roughly 37% of revenue) so investors are right to think the stock could benefit from a pickup in both state and federal spending.

Management has already highlighted infrastructure spending in Texas as a large opportunity, and it called out 65% growth in asphalt sales volume from public projects in the Texas and Kansas areas.

The bottom line is that there appears to be support for infrastructure spending, and Summit should capture its fair share of projects.

Technically, SUM was trading sideways in the $17–$22 range in late 2016 then broke out in early November during the post-election euphoria for many infrastructure stocks.

The rally hit a wall pretty quickly, though, and shares were range-bound for the next six months, hovering between $23 and $25, with one pop to $26.5 (late January) and two dips near 22.5 (February and March).

But the buyers have been active since mid-April, pushing the stock back to 26 two weeks ago, and then last week’s quarterly report lifted SUM to new highs. You can buy here or on dips, with a stop in the 25 area.

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