US Concrete: A Solid Idea

04/22/2014 8:00 am EST


Tyler Laundon

Editor, Cabot Small-Cap Confidential

I want to get a little more exposure to the US construction market before the busy season hits this summer; and there isn't a more simple way to play a construction rebound than with concrete, suggests Tyler Laundon, editor of the 100% Letter.

Mix together some aggregate (gravel or crushed rock), sand, Portland cement, add a little water, and you have concrete. It doesn't get much more basic than that.

The concrete industry generates roughly $30 billion in annual sales in the US. Most of that (65%) is spent on public works projects, while around 19% goes to residential projects, with 16% spent on commercial and industrial projects.

If you believe, as I do, that the US construction market will continue to recover over the next five years, having a little exposure to concrete is almost a no-brainer. So, we're going to jump into concrete with a pure-play small-cap company that has been in recovery mode since the housing bust.

The company is US Concrete (USCR). It has a market cap of $320 million and is based in Euless, Texas. After divesting of assets in the pre-cast concrete market (think stairs, water tanks, etc.), US Concrete is now 100% focused on ready-mix concrete.

"Ready-mix" just means the concrete is mixed at a batching plant then delivered to a jobsite in a cement mixer. This is the type of concrete we're all familiar with.

This is a fragmented market; there are around 2,000 ready-mix concrete producers in the country, operating roughly 5,500 ready-mix concrete plants. USCR operates just over 2% (115) of these plants. It also has eight aggregate facilities, which supply the raw materials, and about 1,000 cement trucks.

USCR's biggest markets are Texas, California, New York-New Jersey, and Dallas-Fort Worth, which collectively account for one-third of all ready-mix concrete consumed in the US.

It is a company in transition. It is emerging from the housing bust, has new management, and a new debt facility. It is transitioning into a more consistent company in terms of operations, as evidenced by the end of impairment charges, a return to operating profits and improving margins.

It is also enjoying strong demand in its end markets, while adding incremental growth through acquisitions. That is helping the company achieve scale, which, in turn, helps to build a more reliable business.

Management has been on an acquisition spree of ready-mix concrete plants and related assets. Over the past two years, it has purchased six small companies, most of which are in California and Texas.

This isn't an overly complex business, so my investment thesis is relatively straightforward. The company is currently small, it is not profitable—it lost $1.56 over the last year—and it is not well known.

A lot of investors probably wouldn't hang around to hear the rest of my analysis after reading that sentence. But our formula for success often begins with small, unprofitable, and unknown companies.

The chance that they will become bigger, profitable, and better-known means there is huge upside potential in the stock.

The stock trades at a dirt-cheap price-to-sales (PS) ratio of 0.52. And it is growing and getting closer to profitability. And when it gets there, the stock is likely to be worth a lot more than $23.

I think we have an opportunity here to get into an unknown stock with a ton of upside.

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