Introduction
Summit Materials (SUM) is a vertically integrated construction materials company with a focus on the production of concrete products and aggregates. Although the company’s share price was punished for missing the Q3 expectations, I think the company still offers upside value as the free cash flows remain strong, even when you include investments in additional growth.
The net income was boosted thanks to a tax benefit, and the free cash flow remained strong
Summit Materials was able to boost its revenue in the first nine months of the year, despite reporting a revenue decrease of almost 3% in the third quarter (which was one of the main reasons why the share price fell). The revenue decrease wasn’t really a reason to be concerned, as you can see on the image below, the COGS also decreased by almost 3% but what really killed the Q3 performance was the 30% increase in the G&A expenses which increased from $62M to $81M.
Source: SEC filings
These high G&A expenses reduced the operating income by almost 25% to just over $100M and despite the lower interest expense (which was mitigated by a one-time cost related to a loss on debt financings), the pre-tax income fell by 30% to $73M. Interestingly, the company recorded a tax benefit of almost $20M and that’s the main reason why the Q3 EPS came in almost 60% higher than the EPS in Q3 2019. But of course, excluding this tax benefit, Summit Materials was clearly missing the expectations on a normalized and underlying basis. Keep in mind the tax benefit will be a one-time item as the company reversed unrecognized tax benefits to the tune of almost $33M.
The net income in the first nine months of the year more than quadrupled to $103M or $0.90 per share, but this was
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