Investors don't have much to complain about when dissecting the recent operational performance of U.S. Concrete (USCR). Management's acquisition-heavy strategy that focuses on high-growth metropolitan areas such as San Francisco and New York has worked out pretty well. The business has more than doubled revenue since 2014. Adjusted EBITDA has grown 158% in that span.
That may not be enough to shake one lingering question investors might have: What happens when the economy stops growing? After all, the rise of U.S. Concrete has been perfectly timed with the economic recovery that followed the Great Recession, and the Congressional Budget Office estimates U.S. real gross domestic product growth will slow to 2.3% in 2019 from 3.1% in 2018.
How should investors navigate the road ahead?
By the numbers
Shares of U.S. Concrete lost 58% in 2018 following the release of a short-seller report, choppy quarterly profitability due to weather-related disruptions, and general market volatility. Analysts weren't happy that adjusted EBITDA margin fell to 12.8% in 2018 compared to a record 14.4% the previous year, but on the full-year 2018 earnings conference call, CEO Bill Sandbrook explained that was mostly due to paying idle drivers on a higher number of weather-impacted days.
The rest of the financial metrics certainly back him up. The business delivered record full-year revenue and adjusted EBITDA of $1.5 billion and $194 million, respectively. Operating cash flow grew 29% from the previous year to nearly $123 million. And the fourth quarter of 2018 marked the 32nd consecutive quarter with a year-over-year increase in revenue. Those solid results might help to explain the stock's 27% year-to-date rise in 2019.
Sandbrook also made sure to highlight the difference between weather disruptions and macroeconomic factors:
Specifically, with respect to our markets, demand remains robust, more jobs are coming up for bid in the coming quarters, the outlook for infrastructure spending is trending favorably, and we have not seen any fundamental decline in construction activity in any of our markets over the last year. It is important not to confuse short-term pressures like weather or inflationary input costs with the underlying macroeconomic demand trends.
... [A]s of January 31, our backlog has increased to 8.2 million yards, which is the same as January 2018. Make no mistake about it, there is no fade in our backlog nor shortage of bidding opportunities in any of our regions. And we are in fact hiring additional drivers to take advantage of the work available.
For perspective, a ready-mix concrete backlog of 8.2 million cubic yards represents over 10 months of projects. The near-term confidence is further evident in the company's full-year 2019 guidance, which calls for revenue in the neighborhood of $1.58 billion and adjusted EBITDA near $215 million. Achieving even the low end of each projected range would result in a record annual total.
Over the longer term U.S. Concrete still sees plenty of opportunities in its core markets. From new skyscrapers in New York City to California's pledge to build 3.5 million affordable housing units in the next seven years, management sees robust demand for multiyear projects.
It's also worth pointing out the advantages of the company's ambitious acquisition strategy in terms of both growth and diversification. U.S. Concrete has grown its national ready-mix concrete market share from 1.7% in 2013 to 2.6% in 2017. The company's ready-mix concrete sales volumes have grown 136% since 2011, well ahead of the national market's volume growth of just 35%. Equally important, it generates roughly equal amounts of revenue from its eastern (34%), central (35%), and western (31%) operations.
What's more, with the recent purchase of a major aggregate producer on the West Coast (aggregate is a key raw material for concrete), the business is diversifying revenue and income while expanding vertically. U.S. Concrete grew adjusted EBITDA from its aggregate segment 53% year over year in 2018 to $42 million, which represented 24% of total adjusted EBITDA. Considering the company is seeking to expand the newly acquired aggregate facility's barge capacity 21% in the near future, there's a significant growth opportunity on the horizon.
Demand remains strong despite slowing economic growth
While U.S. economic growth is expected to fall from 2018 to 2019, the sudden impact from tax cuts played a significant role in the above-average GDP growth witnessed last year. There are certainly headwinds facing the national economy, but all indicators from the construction industry -- projects coming up for bids, region-specific catalysts, a robust order backlog -- point to continued growth for U.S. Concrete in the year ahead. A national slowdown, such as the next recession, would have a major impact on the business, but the biggest risk to shareholders in 2019 appears to be the weather.