U.S. Concrete (NASDAQ:USCR) is a ready-mixed concrete manufacturer. The company buys cement and other raw materials on a daily basis, makes ready-mixed concrete and then sells it to C&I, residential or public work construction contractors in the local market. U.S. Concrete has 144 ready-mixed concrete plants, 1360 drum trucks and 119 mixer trucks in the U.S. Its sales are concentrated in TX/OK 40%, Northern CA 29%, NY/NJ/DC 26% markets. The U.S. concrete industry is highly fragmented and highly competitive with little growth (3-5% per year). There are 5500 operating plants in the U.S. with $30bn aggregate sales in 2005, according to NRMCA.
U.S. Concrete has enjoyed robust growth on the top line and bottom line since emerging from bankruptcy in 2010. The stock rallied 85% in 2015, massively outperforming its concrete and cement industry peers. USCR has shown strong growth fuelled by acquisitions which is unsustainable. USCR revenue has been growing 40-50% y/y in 2015, driven mostly by acquisitions.
USCR did 17 acquisitions in 2014 and 2015 to acquire mixer plants and trucks assets. Most of these acquisitions were financed with debt with some stock issuance. However, this debt fueled acquisition spree may run its course soon as USCR now has a highly leveraged balance sheet with debt/equity ratio of 1.9x with $272m of long-term debt and $165m of equity. Here are the two outstanding notes at USCR:
$250m 8.5% note due in 2018 of which $200m is drawn
$131m variable rate revolver of which $45m is drawn
Recently, several red flags started to occur with CEO/board members insider selling activities and CFO turnover. CEO Sandbrook and three other members of the board of directors have been selling their shares throughout 2015. Board of directors' Colin Sutherland cut his ownership by >50% from 25k to 11k shares. Ex-CFO William Brown who has been with USCR for three years and oversaw all the recent acquisitions left in August 2015 to join another building product company. In January 2016, USCR announced that it has hired Joseph 'Jody' Tusa, Jr. as SVP and CFO. Tusa will oversee the company's financial management, capital markets activity, and investor relations. Tusa was most recently the CFO of Emerge Energy Services LP. If USCR future prospects are so rosy, CEO and company board members should be buying USCR shares and not selling shares, and the CFO should not resign from USCR to join another company.
USCR management/employees incentives are also misaligned with those of shareholders: USCR management and employee bonus incentive is tied to the EBITDA of the company and its business units. This plan incentivizes management to borrow more debt or issue more share to execute more acquisitions to grow EBITDA, but could be value destroying for shareholders if the company overpays for acquisitions or if the cost of capital is too high.
Recently, warm weather on the East Coast and dry weather in Texas this winter also drove the company's strong sales growth and rising gross margin. Texas cement shipments for the month of January were +10.7% y/y which is very encouraging growth given the state has faced an oversupply of cement. I believe the beneficial weather in December and January allowed for de-stocking and bodes well for the $10/ton April price increase. However, USCR's high cyclical exposure to the shaky Texas and Oklahoma oil/gas driven economy should not be ignored. USCR concrete product demand is highly dependent on cyclical construction activity. Around 40% of its revenue comes from Texas and Oklahoma, whose economies are likely to suffer from massive layoffs and imminent bankruptcy filing by numerous oil/gas companies there. If the construction activities slow down in TX/OK or Northern CA, or NY/NJ regions, USCR would have much less cash flow generation and debt capacity to continue financing its acquisitions and service/re-finance its debt due in 2018.
USCR's very low cash balance is a financial concern. While USCR has $171m in A/R and $37m in inventory that can be monetized, its cash balance is very low at $3.9m in December 2015. The company is dependent on the availability of its $250m senior secured credit facility for liquidity. If its construction customers in Texas run into financial trouble due to their the oil/gas sector exposure, USCR A/R may not get paid and this could negatively impact USCR.
At $66 or 6x P/B, 1.0x P/S and 39x trailing P/E, USCR is trading close to the peak of its historical trading range for the last 5 years and is priced for perfection, in my opinion. In summary, I believe that U.S. Concrete's debt fueled acquisition growth strategy has run its course. Investors should expect the stock's recent upward momentum to reverse very soon.
Risk to my short thesis is that the company has been beating consensus earning estimates for last few quarters driven by acquisition growth, better organic volume growth (~1% y/y) and improved pricing (5-10% y/y). Sales and profit have been improving last 5 years driven by numerous acquisitions and end market growth. Seasonally warm weather has also been helping with demand and contributing to stronger than expected revenue growth at USCR.
Disclosure: I am/we are short USCR.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.