America's Robust Infrastructure Pipeline Keeps Paying Dividends for U.S. Concrete

The American Society of Civil Engineers releases a report card for America's infrastructure every four years. When the last grade was handed down in 2017, the nation earned a D-plus and faced a 10-year funding shortfall of over $2 trillion. But there could be reasons for cautious optimism.

A number of metropolitan areas from New York City to Dallas-Fort Worth to the San Francisco Bay Area are throwing down multibillion-dollar investments on long-overdue improvements. All of those regions are served by U.S. Concrete (USCR), which has been busy consolidating the urban ready-mix concrete industry throughout the record economic expansion.

While the business posted record quarterly results in the third quarter of 2019 and expects growth to continue through 2020, management struck a cautious tone for full-year 2019 results. Wall Street responded by selling off the infrastructure stock. Here's what investors need to know about the latest operating results.

Image source: Getty Images.

A break in the weather allowed growth to resume

In the third quarter of 2019, U.S. Concrete enjoyed a reprieve from the wet weather that had plagued its ready-mix concrete business earlier in the year. Sales volume grew during the quarter compared to the year-ago period, but remains about 5% lower through the first nine months of 2019. The decline has been partially offset by higher average selling prices (ASP), which vary from region to region but have generally remained strong this year. 

Meanwhile, the aggregate business hasn't been washed out by the weather. (Aggregate is the rocky material comprising the bulk of concrete.) The segment achieved a slight increase in sales volume this year, which went even further thanks to a 6% increase in ASP. 

U.S. Concrete managed to deliver record quarterly total revenue, total adjusted EBITDA, ready-mix concrete revenue, and aggregate adjusted EBITDA, but there were other headwinds. The business faced a driver shortage in Texas (one of its best growth markets) and a slowdown in residential housing projects in the Bay Area.  

Data source: Press release. YOY = year over year.

The sudden drop in operating income is primarily due to increases in overhead plus a roughly $15 million gain on the sale of a business in 2018. However, that's not what spooked Wall Street. 

Management now expects to deliver revenue and adjusted EBITDA at the low end of full-year 2019 guidance, or approximately $1.5 billion and $195 million, respectively. The high ends of the ranges weren't much different -- at $1.575 billion and $210 million, respectively -- and simply meeting the low end of guidance implies a relatively strong fourth-quarter performance, but that didn't matter to analysts. 

U.S. Concrete said it expects to address its driver shortage in Texas next year. It also expects to achieve low-to-mid-single-digit growth in both volumes and ASP in 2020. But the most important development might be the company's ongoing efforts to improve operating efficiency and margins.

Image source: Getty Images.

Looking ahead

As the company looks to build vertical positions in each of its major markets, it will increasingly focus on aggregates. It's an inherently high-margin business -- adjusted EBITDA margin was 30.8% in the third quarter of 2019, compared to 14.5% for the larger ready-mix unit -- and provides opportunities to fuel growth and margin improvement in the ready-mix segment.

Aggregate revenue comprised 13% of total revenue in the first nine months of 2019, up from just 6% in 2017. Much of the growth in that span can be attributed to the acquisition of Polaris Materials on the West Coast, but the company is eager to beef up aggregate assets in other major regions. 

U.S. Concrete expects to bring a new aggregate facility online in Texas before the end of 2019 and complete a modernization project at a West Texas asset in the first half of 2020. That should have a lasting impact on profitability for the business as a whole -- and tap into major infrastructure projects.

Major metropolitan areas are planning to spend big on infrastructure in the coming years. In Texas, Dallas-Fort Worth International Airport announced a $3.5 billion plan to build a new terminal, while a $16 billion high-speed rail project connecting Dallas and Houston is inching closer to reality. The latter would require three times more concrete than the Hoover Dam.

Meanwhile, New York City approved a $51.5 billion plan to overhaul its transportation system. Another $1 billion is being spent on a seawall around Manhattan. In the Bay Area, tech companies are pledging billions of dollars for affordable housing initiatives.

Promising potential if the company can execute

If U.S. Concrete can grab a piece of any of the major projects in its core regions, then the company's growth runway should extend well beyond 2020, especially if it can get new aggregate facilities up and running on time and on budget. And even if the company loses out on lucrative supply deals, the prices of aggregate and ready-mix concrete would likely increase in regions with high infrastructure activity -- providing a boon for business.

Simply put, U.S. Concrete remains an intriguing growth stock for the long haul, but investors cannot dismiss the recent share price volatility.