Thursday, May 11, 2017

A current AIM Fund holding: U.S. Concrete (USCR) by Holly Kuffel. “Laying the Foundation for a Solid Hold”

U.S. Concrete, Inc. (USCR, $70.85): “Strong as Concrete”
By: Holly Kuffel, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

U.S. Concrete, Inc. (NASDAQ:USCR) produces and distributes ready-mix concrete, aggregates and other concrete-related products and services primarily to the United States construction industry. The company operates through two segments: Ready-Mixed Concrete (93.3% of total revenue) and Aggregate Products (6.7%).

• The Ready-Mixed Concrete segment formulates, prepares and delivers customer-specific concrete solutions to customers’ job sites in addition to providing on-site services, and the Aggregate Products segment offers crushed stone, gravel and sand for use in commercial, industrial and public works projects.

• Demand is driven primarily by the construction industry (55%-60% of concrete revenue) and the residential housing markets (25%-30%).

• USCR thrives off successful acquisitions and management alludes to several potential acquisition and expansion plans outside of their three largest market positions: New York, California and Texas.

Key points:
U.S. Concrete has secured its position in the AIM Domestic Small Cap portfolio. AIM’s original recommendation from September 2016 consisted of drivers regarding continual growth in market share, rising construction spending and high success with acquisitions. U.S. Concrete remains aligned with these drivers, and with an extremely impressive LTM of price performance, USCR solidified its position as the leading U.S. producer and distributor of ready-mixed concrete. USCR recently exceeded AIM’s initial price target of $66.37, but there are still high expectations for demand in upcoming years.

In April 2017, USCR completed their latest acquisition of New Jersey’s Corbett Aggregates Company and gained access to 401 acres of land and over 35 million tons of aggregate reserves. This acquisition plays a fundamental role in USCR’s strategy for vertical integration and gives a sense of self-sufficiency in the aggregates market, especially where resources like natural sand are quickly depleting. 

As a result of over 17 acquisitions since 2010, USBR has grown over 80% and management anticipates continual growth and profit recognition. As USCR realizes considerable cash flows, they utilize their cash to pay off debts and scout out new investments. In USCR’s 1Q17 earnings report, management alluded to a pipeline of acquisition opportunities in both segments and expansion into new metropolitan areas in order to further vertical integration.

Demand continues to thrive from large construction projects in metropolitan areas, in addition to the growing housing market. USCR is continuing to realize profits from Obama’s highway bill, which extends through 2020. Following Trump’s presidency, the company’s price rose over 40% from acquisitions and demand. Yet, there is high speculation regarding the potential “Trump wall,” in which USCR would be the primary concrete supplier.

What has the stock done lately?
Share prices struggled throughout March 2017 when USCR’s audit committee replaced Grant Thornton with Ernst & Young after recognizing material weaknesses regarding accuracy and completion of tax accounts. Additionally, on March 24, 2017, CFO and Senior VP Jody Tusa, Jr. resigned for personal reasons and is expected to take effect July 1, 2017. This announcement alone resulted in an 8.85% plunge in stock prices. Despite their rocky start to 2017, 

USCR released 1Q17 results on May 4, 2017, resulting in a 14.3% increase in price from $61.90 to $70.75 after exceeding growth expectations and capitalizing on strong demand for concrete. Looking forward, demand for ready-mix concrete is expected to have a strong economic outlook.

Past Year Performance: In the past 12 months, USCR has increased 12.8% from $62.83 to $70.85. Since the initial pitch in September 2016 at a price of $48.34, USCR has experienced significant upward momentum. USCR increased prices by about 6% over the prior year due to strong demand, selling approximately 8.1 million cubic yards of ready-mixed concrete and approximately 5.6 million tons of aggregates. USCR also completed six acquisitions, four of which are concrete producers in New York. Not only did this solidify USCR’s #1 position in the market, but it reflected greatly on their earnings statements during the last four quarters.

1 Year Stock Chart vs. Benchmark
Source: FactSet
My Takeaway
Continual growth and expansion through acquisitions continues to benefit USCR and enhance their large market share. Although the company has reached its 52-week high, it continues to exceed quarterly expectations and take on significant construction projects. USCR has positioned itself well for the continuous rise in demand for concrete and aggregates and will generate healthy cash flows over upcoming years that can be utilized for further investments.

1 Month Stock Chart
Source: FactSet

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