Shares of U.S. Silica Holdings (NYSE:SLCA), an industrial minerals and logistics company, fell dramatically on May 28, dropping as much as 20% in early trading. By roughly 3 p.m. EDT the shares had regained some of their lost ground, but were still off by a painful 17%. A change in opinion from a Wall Street analyst was the likely cause, but there's really a bigger picture here to think about.
An analyst at Barclays moved U.S. Silica from equal weight to underweight. At the same time the analyst lowered the price target on the stock from $12 per share to $10, a roughly 17% reduction. Investors don't generally like to see analyst downgrades, so it makes sense that the stock fell on the news. However, the drop was fairly large, suggesting that there is more to today's price action than there at first seems.
The key story at U.S. Silica is that the company is attempting to diversify its business. The company's key product is sand, which is used in many applications, but came to be tightly associated with hydraulic fracturing. The energy business, particularly the onshore U.S. fracking sector, hasn't been particularly robust for a few years at this point. To adjust, management is looking to broaden its reach into new areas, including the acquisition of a logistics company and the expansion into other materials.
However, as the Barclays analyst pointed out, this revamp will take time and cost money. And it is far from certain that the effort will prove successful. So not only did the stock get downgraded, but the downgrade basically questioned the story underpinning the company's future. That broader view helps explain the particularly negative mood about the company today.
U.S. Silica is a company in the middle of a major overhaul. It is probably best for conservative long-term investors to watch from the sidelines until there's more material progress. More aggressive types, meanwhile, should make sure they fully understand the direction the company is taking, as well as the cost and potential timing, before jumping on board. As today shows, there is clearly a lot of risk here.