Shares of U.S. Concrete (USCR) fell nearly 58% last year, according to data from S&P Global Market Intelligence. Two sources of uncertainty weighed on investors' minds. First, numerous accusations were made about the legitimacy of the business in a short-seller report published by Spruce Point Capital at the beginning of 2018. The report appeared to take some things out of context, while other claims were proved false by healthy operations throughout the year.
Second, there were general worries that a red-hot infrastructure market would inevitably cool down after enjoying a prolonged growth cycle on the heels of a record-setting bull market. Hitting the peak of the cycle could pose a problem for US Concrete, which exited September 2018 with $700 million in long-term debt.
As of Jan. 11, the stock had settled to a 3.8% loss since the beginning of 2019.
Despite the awful stock performance last year, operations remained comfortably profitable and still boast a solid growth outlook in the year ahead. Operating margin fell to 6.4% in the first nine months of 2018 compared with 8% in the year-ago period, although lower tax expense helped the company deliver diluted income per share roughly equivalent to the same period of 2017. Operating cash flow grew 7% in the comparison period.
The financial performance improved as the year went on. The business conjured up record quarterly revenue in the third quarter of 2018 and demonstrated impressive results for Polaris Materials, an aggregate business that was a central focus of the short seller report earlier in the year. (Aggregate is gravel-like material that comprises the bulk of concrete.) US Concrete acquired the West Coast business in late 2017 to complement its fast-growing cement businesses in the San Francisco Bay Area and Los Angeles.
While investors shouldn't expect the booming infrastructure market fundamentals to last forever, analysts appear to be overlooking the key advantages of US Concrete. The company operates primarily in fast-growth urban markets, is increasing its use of environmentally friendly materials that fetch a premium price, focuses on high-margin applications (read: skyscrapers and airports, not roads and residential), and can leverage its size to continue consolidating a highly fragmented industry.
Those consolidation efforts have led to a swelling debt pile, which might begin to worry investors if earnings growth stops. However, right now shares trade at an enterprise value-to-EBITDA ratio of 7.8, which is roughly half of that of larger peers Vulcan Materials and Martin Marietta Materials. Throw in the fact that US Concrete stock trades at just 9 times future earnings, and opportunistic investors with a slight appetite for risk may want to give this infrastructure stock a closer look in 2019.
Check out the latest U.S. Concrete earnings call transcript.