US Concrete: Buy the Dip?

Every year since 2013, shares of ready-mix concrete leader US Concrete (USCR) have ended the year higher than where they started. Part of that is due to an epic upcycle in the concrete and cement market, although an aggressive growth strategy has added a multiplier to the growth rates that would have been expected otherwise. At a market cap of just $1.1 billion and with $1.3 billion in revenue last year, the company has plenty of room to expand in the $30 billion U.S. market for ready-mix concrete, the material that comprises most of its business alongside aggregate. 

While the long-term potential remains strong, the company's aforementioned streak of stock-price appreciation is in jeopardy just three months into 2018, as shares have cratered 26% year to date. Considering its track record of growing revenue by at least double digits every year, should opportunistic investors consider buying the dip in US Concrete stock?

Image source: Getty Images.

By the numbers

US Concrete turned in a pretty solid 2017 campaign thanks to a healthy string of acquisitions and rising selling prices. In fact, the building materials specialist makes so many acquisitions that it felt the need to get a little creative with the title of the press release announcing the most recent deal.

However, while acquisitions drive growth, they're also accompanied with higher near-term costs until being fully integrated into the company's operating universe. That partially explains why the year-over-year increase in cost of goods sold (14.6%) slightly outpaced revenue growth (14.4%).

Acquisitions also have longer-term effects that shouldn't be overlooked by investors. Consider that selling, general, and administrative expenses increased 19.2% from 2016 to 2017, while depreciation expense soared 23.6%. Interest expense jumped 51% in that span. Similarly, spending cash to fund upgrades of recently acquired facilities sapped operating cash flow last year as capital expenditures rose.

The result: Operating income fell last year despite top-line growth and higher selling prices compared to the prior-year period. 

Data source: SEC filing.

Should investors be concerned with anything in the table above? While some financial metrics aren't displaying ideal year-over-year trends, I don't see any major red flags from 2017 operations and only minor changes in the risk profile.

The biggest downside to the company's aggressive acquisition strategy has been and will likely continue to be the large increase in long-term debt over time. US Concrete saw its debt-to-assets ratio climb to 54% last year compared to 40% in 2015. It should be noted that most of the increase came from a single acquisition in 2017, which added roughly $230 million in debt to get its hands on an important long-term source of raw materials for its West Coast operations. Most acquisitions are of the smaller bolt-on variety by comparison. Nonetheless, swelling debt balances could come back to bite shareholders during the next down cycle. 

Even if investors are willing to accept the risks posed by the company's multiyear acquisition spree, is US Concrete a buy? Well, the stock has fared much worse than peers Cemex, Vulcan Materials, and Martin Marietta Materials to open 2018. It also happens to be more attractively priced on several key valuation metrics.   

Data source: Yahoo! Finance. P/E = price to earnings. P/S = price to sales. EV = enterprise value. EBITDA = earnings before interest, taxes, depreciation, and amortization.

It shouldn't be too surprising that the much smaller US Concrete is capable of growing faster than its larger peers. But it's important to remember that the company's operations are also all concentrated in major metropolitan areas. That allows it to enjoy industry-leading selling prices and to focus more heavily on major projects (hint: the 2028 Olympics will be in Los Angeles), rather than residential markets. Since skyscrapers and corporate campuses are bid on years in advance, the company has a backlog of projects that will keep it busy for years to come -- and give investors fair warning when the markets begin to turn sour. The same cannot be said for companies relying on new home construction for a sizable portion of their business.   

Should investors buy the dip?

When it comes to growth stocks with an appetite for acquisitions, it's not uncommon for Wall Street analysts to look the other way on the bottom line so long as revenue continues to increase. Eventually, the torrid pace of acquisitions will enable a larger base of operations from which to generate stable profits, or so the thinking goes. That's largely been the case with US Concrete stock over the years, although Mr. Market has allowed shares to cool off in 2018, perhaps a nod to the stock's meteoric rise in the last five years or so.

That said, if you're looking for an above average growth opportunity at an attractive price, then I think you should feel comfortable buying US Concrete stock after its horrendous start to the year. On the whole, the business is stronger than it was at the start of 2017, but the stock price is actually lower. That's not something that happens very often for companies growing this quickly. While there are concerns and caveats for every investment, this opportunity may be too good to pass up.