The top of the cycle had been reached. The industry was due for a slowdown. There was no way companies such as US Concrete (USCR) could sustain its valuation metrics. That's what many investors and analysts were predicting for 2017. Turns out, they were wrong.
The pessimism never came true in the last 12 months, anyway, as urban cement supplier's stock has continued to trek higher throughout the year. While shares hit new 52-week (and all-time) highs earlier this month, the company's impressive market position could bias investors toward owning the stock for the long haul. After all, the company has grown year-over-year revenue in 27 consecutive quarters. So should you buy the stock at the high?
Surveying the landscape
US Concrete focuses operations in four major markets: (1) New York/New Jersey/D.C., (2) Northern California, (3) Northern Texas, and (4) Western/Southern Texas. In fact, it owns a top 3 position in each market. The urban-heavy strategy has some obvious advantages.
Demand is higher, resulting in higher volumes of cement sold. Customer density is off the charts, allowing the company to concentrate manufacturing and logistics assets in a small footprint. And selling prices are toward the premium end of the industry range. All three combined result in baked-in growth, ample opportunities for expansion, and higher margins than industry peers.
The last point is worth hammering home. Although the urban strategy has historically helped US Concrete enjoy selling prices per cubic yard higher than the industry average, the gap grew to comical levels in 2016. The company achieved $130.35 per cubic yard sold by the end of the year, while the industry average stood at just $107 per cubic yard. The rising trend has continued each quarter this year -- and in 26 consecutive year-over-year quarterly comparison periods -- weighing in at $134.46 per cubic yard at the end of the third quarter of 2017.
Steadily climbing price per unit sold is a metric that will always be welcomed by shareholders, no matter the industry, especially when volumes sold are increasing simultaneously. That has resulted in a formidable one-two punch for epic growth, which has been the key driver pushing US Concrete stock to 191% gains in the last three years.
That demonstrates the value and traction of management's aggressive urban expansion strategy, last bolstered by the acquisition of aggregate (or the large rock fragments that provide strength to mixed concrete) producer Polaris Materials. The deal will allow US Concrete to self-supply most of its aggregate needs for the Northern California market and provide opportunities to expand in other West Coast markets. That also will shift its dependency on externally sourced aggregates from 77% to just 59%.
But would that strategy continue to pay off in an industry that's working through plateauing or declining demand? After all, the stock's incredible performance since launching in the public markets in 2011 (following a bankruptcy) has come during a bull market for infrastructure-related industries. A pullback will occur eventually.
Well, given the company's leading market position and ample operating cash flow, US Concrete could actually accelerate its expansion strategy during a downturn. Management estimates that the U.S. market for ready-mix concrete generates annual revenue of $30 billion spread across 2,200 producers and 6,500 manufacturing plants. Most are small local and regional players, which makes for an incredible opportunity for industry consolidation.
It's something investors have seen play out in numerous industries since the Industrial Revolution, from Carnegie's steel empire to oil majors to ethanol producers. If smaller building materials players land on hard times when the current upcycle begins to slow down (or worse), then few companies are better positioned to adopt an aggressive posture than the high-margin, wheeling-and-dealing US Concrete.
What does it mean for investors?
Growth seems unlikely to slow down anytime soon for US Concrete. That's evidenced by Wall Street's expectations for near-term growth. Despite a relatively expensive trailing PE ratio of 108, shares are currently trading at just 16 times future earnings.
Would a market downturn force the company to make difficult decisions and have the potential to impact operations? Absolutely. But the company is well positioned to turn the next down cycle into an epic long-term growth opportunity by taking a lead in industry consolidation activities. Long story short, although US Concrete stock is near all-time highs today, long-term investors could still find room for it in their portfolio.