If investors browsed through a catalogue of all 1,500 products manufactured by U.S. Silica (SLCA 6.12%), white granules intended to be used in asphalt roofing shingles probably wouldn't spark much interest. In fact, the engineered materials weren't even part of the $750 million acquisition of EP Minerals in 2018 that has been responsible for the overnight expansion of the industrial segment; that distinction goes to the comparatively small $18.6 million acquisition of White Armor the year before.
Nonetheless, those little white granules represent a tantalizing growth opportunity for the industrial segment. That's because a growing number of contractors, homeowners, and even politicians are warming up to the idea of money-saving cool roofs built with energy-efficient materials. Here's why investors should pay closer attention to the under-the-radar growth catalyst being overlooked by Wall Street.
Don't sleep on the industrial segment
A confluence of headwinds has torpedoed shares of U.S. Silica in recent years. Weak oil prices, a soaring count of drilled but uncompleted wells in major shale energy regions, and a preference for new types of drilling aids have all worked against the frack sand supplier in its core market. Case in point: Average selling prices (ASP) to oil and gas customers dropped 30% year over year in the first quarter of 2019.
That stat helps to explain why shares have receded 38% since the end of March. However, an obsession with oil and gas markets means Wall Street is failing to acknowledge that the business is increasingly relying on industrial applications of its vast sand and mineral reserves for revenue and profits. After all, the industrial segment contributed 31% of total revenue in Q1 2019, compared to only 15% in the year-ago period. It also boasts an ASP per ton that's 81% higher than the oil and gas segment.
Wall Street's failure to value the growing diversification under way suggests analysts are missing the significant industrial opportunity in cool roofs. Investors with a long-term mindset might want to avoid the same mistake.
Cool roofs save energy, boost solar panel performance, and more
Anyone who's ever made the mistake of walking barefoot across asphalt on a hot summer day knows that dark-colored surfaces are efficient at absorbing solar energy. Unfortunately, that's exactly what makes most roofs incredibly energy inefficient.
Black rubber roofs atop commercial buildings or dark-colored asphalt shingles on residential buildings only reflect about 5% of solar rays back into space, leaving most absorbed by the building itself. White- or light-colored materials can boost the amount of solar reflectance to 70%. The exact numbers can vary, but the temperature of a white roof is typically 40% lower than that of a dark roof. That's why the former is called a "cool roof."
A cooler roof translates to a cooler building and less energy used for air conditioning, in some cases as much as 20%. It also means the roofing materials will last longer, since they aren't transitioning through such large temperature swings throughout the day or year. Additionally, cooler roof temperatures increase the longevity and energy output of solar panels -- the latter by as much as 12%.
Pairing a cool roof with a rooftop solar module creates a one-two punch of energy efficiency: Less electricity is required for air conditioning, which allows the same-sized solar array to power more of a building's energy needs. In other words, a solar module that might otherwise meet just 70% of a building's electricity consumption could power the entire structure.
White Armor: U.S. Silica's cool-roof play
The reality is that replacing dark roofing materials isn't so simple. A lot of materials science goes into engineering granules that are truly white, can resist staining and algae growth, repel water, are strong enough to withstand decades of direct sun exposure, and are produced with consistent size and shape to be used seamlessly in existing manufacturing processes for, say, asphalt shingles. That's where the White Armor brand of white granules from U.S. Silica comes into play.
The company has retooled a recently acquired manufacturing facility in Millen, Georgia, to churn out the product in significant commercial quantities by the end of 2019. That could be enticing for building materials leader Owens-Corning (OC 4.11%). The company's top cool-roof product manages a solar reflectance of only 30%. By comparison, White Armor granules boast a market-leading real-world-tested 70% solar reflectance.
Even after coatings and treatments that reduce reflectivity, White Armor will be comfortably above the minimum solar reflectance rating of 20% for most cool roofs. With estimated net savings of $0.50 per square foot per year, the average American home would save $1,000 annually with a cool roof enabled by U.S. Silica's engineered materials.
That helps to put the potential of White Armor granules into perspective, but the opportunity is still difficult to quantify -- and that's a good thing. The fast-changing regulations mandating cool roofs from California to Eastern Europe to Japan are creating a multibillion-dollar market opportunity, with some estimates approaching $30 billion by 2025.
An important part of the diversification strategy
The growth potential of White Armor granules illustrates how seriously management is taking diversification efforts. For the company to escape the perpetual volatility of its core oil and gas market and remain comfortably profitable in any pricing environment, it will need to continue growing its industrial product offerings -- and perhaps score a big win here and there. If White Armor granules can capitalize on the coming opportunity in cool roofs and show early signs of progress in the next year or two, then Wall Street might be a little more forgiving when it comes to U.S. Silica stock.