rock boy

Here's Hoping For a U.S. Concrete, Inc. Buyout

Now RMIX looks really interesting after last night's pre-announcement. The stock is now trading at about 6x 2007 depressed EBITDA that I figure is in the low $80's. That is a valuation I can get very excited about. With any stabilization in housing, EBITDA goes back into the mid $90s, the multiple goes back to 7-7.5x and the stock is a $9-10 stock a year from now. You may get their sooner if there is a buyout though I think that is less likely given the current credit markets. Even without multiple expansion you get back to $8 from $5.25 today.

Here's Hoping For a U.S. Concrete, Inc. Buyout

Not that surprised by the results. Obviously the other income line helped them in getting to the midpoint of the revised guidance. It looks like they've pulled down 2H volume guidance from flat to down mid to high single digits which makes more sense in the current environment. However, to make guidance I think they are going to need the June price increase to stick and material margins will need to continue to expand which might be difficult in this environment and they are going to need a big Q4. So overall, the guidance looks more achievable now than it did after the Q1 call but I still think there is risk to the guidance. The real question now is valuation -- the stock is now trading at where it did after the Q1 call on lower guidance and well above where it traded in January before the company reiterated guidance (which it has now lowered). It wouldn't surprise me if the stock gives back most of its gains from yesterday over the next two weeks.

Here's Hoping For a U.S. Concrete, Inc. Buyout

No problem. At the end of the day, I think this is a good company that is basically a call option on a recovery in housing. That said, the prospect of a turnaround in housing continues to get pushed out which just extends out when this company will start to get interesting. At current prices, it feels like you have to bet on a recovery starting in Q4 which I don't think is likely.

Here's Hoping For a U.S. Concrete, Inc. Buyout

Good question. This is truly a local business. Let's say within Dallas (RMIX's largest market), clearly they are a logical buyer for assets because (i) there are some synergies by consolidating depots etc. but you don't really do much about the biggest cost which is materials like cement and aggregates; and (ii) you might take out someone who is polluting price in the market. So buying smaller players at 4-5x EBITDA can create some synergies. However, outside of tuck-ins, my understanding is that the biggest players in consolidated markets (i.e. like RMIX's operations in Dallas) might go for as much as 6-7x EBITDA. Still below where the stock is currently trading. So then you need to ask yourself, would a cement maker buy them to forward integrate? I don't think that makes much sense as noted in my prior post. Also, most of the large cement players would only want concrete companies in markets that they are already in. So for example, TXI which has plants in TX and Southern CA might want concrete operations in those markets (in fact it does have concrete in TX - this is how the business started about 50 years ago) but wouldn't really want concrete in MI, Northern NJ, Northern CA etc. which are the other markets that RMIX operates in. TXI wouldn't want to buy these plants in the hope of eventually building cement operations there because it is virutally impossible to get any new cement plants permitted (this is another reason why I think cement is a better business than concrete).

All that said, the stock was up 16% today so I might be wrong (though I suspect that the other shoe is about to drop that a major hedge fund is in liquidation and was liquidating a number of long and short positions today regardless of price). Earnings will be interesting tomorrow.

Good luck.

Here's Hoping For a U.S. Concrete, Inc. Buyout

Not sure if you should be as optimistic that this signals an increased likelihood of a change of control. As disclosed in the proxy back in April, each of the managers already had this program in place pursuant to employment letters or previously issued employment agreements. The new CEO got the same deal as the old CEO (3x annual base plus bonus) and the CFO got stepped up from 1x to 2.5x (he also got promoted), and it looks like the rest of mgmt stayed in line with their old deals.

Besides, not sure how a buyout of this business would happen. Though it trades at only 7.5x EBITDA, RMIX is buying concrete producers for 4-5x EBITDA. There are not much in the way of synergies (by mgmt's own admission) so outside of arbitrage it is not clear what value they are creating.

Finally, to your point that a cement producer would want to buy a concrete mfr - I'm not really sure that is the case. Domestic cement mfrs enjoy very good pricing power given the shortage of domestic cement (and high cost of imports) in the US. Generally, cemenet mfrs do not have issue finding customers for their product so they have little need to forward integrate. Concrete producers are much more of a commodity who quite frankly are getting squeezed between the pricing power of the cement (+8% pricing) and aggregate (+12-14% pricing) makers (the combined cost of which which represent about 50% of revenues) and the the housing slump (about 50% of concrete is used for residential).