Why U.S. Silica Is A Buy For Long-Term Growth

May.10.12 | About: U.S. Silica (SLCA)

U.S. Silica (NYSE:SLCA) just had its IPO back in January of 2012. For a company that has been in business for over 100 years, I was surprised to see them go public. When looking at the current activity in the oil fields around the US and the shortages in supplies (equipment and personnel too) it certainly requires taking a look at them.

US Silica makes a wide array of sand (silica) based products. From proppant sand used in fraccing a well, to paint additives, to glass products. With such a diversified range of industries they support, it is not likely that all of them will reduce at the same time, regardless of the macro environment. The oil and gas segment seems to be the major focus at this time and with locations or existing rail routes already established to the 5 most active parts of the US O&G activity, it seems to be a good focus for the time being. While the natural gas prices have been depressed for the past year, we are seeing some movement upward, and of course oil is still quite high. With the exploration and production of all the major oil companies still going hard and heavy. Even under depressed prices, many oil companies will still continue E&P to both hold onto leases as well as finishing well completion and shutting them in until the prices move to a more favorable level.

With a P/E of 17.31x vs. industry 30.01x, gross profit of 41.23% vs. industry 28.23%, operating profit of 22.01% vs industry 9.01%, and net profit 13.71% vs. industry 2.41%; SLCA sure looks like a great investment. The growth rate is 4 times the industry standard, however this is expected considering they just went public. Obviously they saw the need to expand and the public offer was the best way to achieve this.

The debt to capital ratio (57%) is slightly higher than the industry norm (47%); however with an Interest Coverage ratio of 7.85 and a Quick ratio of 3.29, the company should be able to easily repay debt.

FY12-Q1 Earnings came in at $0.38 per share beating the $0.32 consensus. Q1 net was $19.1M on sales of 102.6M (18.6% PM), with FY12 Rev. $395M-$420M. Guidance of adjusted EBITDA $142M to $150M. Earnings Y/Y went from $0.07 to $0.37 (528% increase). Cash on hand is $84.6M, total assets of $643M, long term debt of only $254.8M, and total liabilities of $443.6M.

Looking at the chart when earnings came out (05-08-2012), it appears that the Street, while aiming low, expected higher results that they reported. The drop on report was very significant and unexpected. Over the following days it has continued to fall, and is running now at about $15.00 (05-10-2012). This appears to be a good time to buy in, it certainly may go lower, and a good covered call position(s) will certainly help in reducing you overall cost. Timed properly, covered calls can continue to bring in revenue to the investor regardless of the minor ups and downs of the stock.

The largest risk looming is what the Federal Government is going to do to regulate the fraccing industry. While it is a concern, and while it will affect SLCA, fraccing is not going away. The largest concern that is often raised on fraccing is the chemicals they use for bactericide, gelling agents, anti-swell, friction reducers, etc.. The proppant (sand) is not a concern. If the areas of concern are limited by regulation, then the need for higher quality (and higher price) proppant will be needed and SLCA will be there to meet the need.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SLCA over the next 72 hours.