US Concrete: Ready To Crack Under Pressure

by Sonya Colberg Senior Editor - 3/30/2016 9:43:35 AM

Investing in US Concrete is like investing in a pair of concrete shoes for your investment portfolio.

The stock, (NASDAQ CM: USCR), is set to go down, down, down, in our view. And US Concrete investors could soon find their portfolios swimming with the fishes.

US Concrete sells ready-mixed concrete principally to customers in its home state of Texas, plus northern California and New York/New Jersey.

The company hasn't responded to our request for comment but investors may find other viewpoints here.

Meanwhile, let's look at an executive summary followed by details on why stock in this concrete company looks ready to crack under massive pressure.

*Executive Summary
*Ridiculous valuation.
*Insider selling of company stock.
*Quarterly revenue slip.
*Nothing proprietary.
*Sensitive to economic stagnation, a housing bubble or just an economic hiccup.
*Very low cash, suggesting the need for a raise such as a stock offering.
*Excessive executive compensation equal to nearly one-quarter of the company's entire net income.

*Numbers Would Scare Even Crazy Joe

TheStreetSweeper has seen more than our share of crazy ratios over the years. But one key Concrete ratio absolutely floored us.

US Concrete's trailing Price-to-Earnings ratio hit an incredible 544!  That means people are paying 22 times more for US Concrete than the average 24 P/E seen within the industry overall.

Why? A P/E of 544 is just as outlandish as the nearly $1 billion market valuation placed on a company that is not curing cancer or selling the fountain of youth ... rather a company that sells cement. And it sells cement primarily in just three regions of the country.

That bizarre ratio hasn't gone unnoticed by the folks that investors look to for guidance ... insiders.

*Insiders Yell, "Sell!" At Well Below Today's Price

US Concrete insiders have taken shares on a brisk walk to the auction block time and again over the last three months. In fact, insiders apparently had enough questions about the future of the stock that they didn't bother making even one open market purchase from December through today.

Instead, investors were treated to selling news like this just last week:

(Source: ConferenceCallTranscripts.org)

It's always disheartening when executives sell the company stock. But CEO Sandbrook isn't alone. In the last couple of weeks, other executives and directors have jumped in to sell off chunks of the company stock.

(Source: MarketWatch)

But another zinger exists within this insider selling.

Insiders sold stock a couple of weeks ago at about $8 cheaper than the current all-time high of around $63 per share.

That's right.

Selling at that point suggests insiders may consider the stock overvalued at around $55 per share.

We agree. The stock is massively overpriced.

*Wrong Way Revenue, Admin Costs, Payables

The company's slipping quarterly revenue, increasing accounts payable and skyrocketing administration costs point to additional reasons we believe the stock is grossly overvalued.

The chart below breaks down those factors:

(Source: Nasdaq)

So revenue dropped by nearly $32 million last quarter versus the prior quarter. Meanwhile, executive compensation, utilities and office rent costs rose by nearly $4 million - the highest in four quarters.

Accounts payable - debts which must be paid off in the short-term to creditors - shows an increase of $10 million - also the highest level over the past four quarters at $160 million.

Not a good situation. But let's look more closely at how, even without their recent stock sales, executives are able to live like kings.

*Executive Enrichment

US Concrete's top executives pulled down total compensation in 2014 of $4.7 million or nearly one-quarter of the company's entire net income.


(Source: Salary.com)

*Prone To Recessionary Trouble

Those executives' lifeblood, US Concrete, is vulnerable to economic coolness that can break up concrete sales for   bridges, high-rise buildings and houses. Various experts have discussed the development of a possible housing bubble as the economy stumbles back from the near-dead. This housing growth has benefited US Concrete growth and helped push the stock price to record highs.

“(Concrete companies) are highly susceptible to the overall economic cycle and the construction cycle,” CJS Securities analyst Craig Bibb told Investors Business Daily in a primarily bullish piece.

"Ken Mayland, president of ClearView Economics, said that he and most economists anticipate modest economic growth this year — around 2.5% GDP expansion — with continued strength in the growth markets in which U.S. Concrete operates."

IBD continued, "He said, though, that soaring real estate prices in cities such as San Francisco and New York City could make them vulnerable to sharp corrections if there is a real estate bust."

The problem comes down to two biggies: First, if housing really is developing a bubble, the inevitable pop will puncture US Concrete. And second, what goes up must go down - and in the case of stock, the drop can be mind-numbingly rapid.

Meanwhile, interest rates are rising and threaten to especially squeeze first-time home buyers out of the market, ultimately busting up concrete use.

*What About Oil?

And then there's the effect of oil prices.

US Concrete noted that its west Texas volume declined somewhat because of lower priced oil (WTI or West Texas Intermediate) last year. The impact on Concrete could spread as, according to the FXStreet report here yesterday, March 29, WTI dropped 3.33 percent:

(Souce: FXStreet)

All those factors - economic doldrums, rising interest rates and low oil prices - would begin to dry up US Concrete and the nation's many other concrete companies as they try to sell their non-proprietary products.

Yet, here we have US Concrete, another risky roll-up with eight acquisitions rolled up in 2015 alone. And while 2015 revenue rose nicely to $975 million, acquisitions accounted for $231 million - almost a quarter of that. Most unfortunately, out of all that revenue, net income came to only $25.5 million.

Meanwhile, buying others' revenue oftentimes backfires as the financial and mental distraction costs soon begin to mount. Indeed, US Concrete looks a bit like a glorified version of a boring roll-up called Swisher (SWSH $8.77 prepublication, now $0.93 per share).

*Conclusion

Even if we can somehow overlook the madly waving red flags, US Concrete will need cash if it wants to stick with its business plan of acquiring companies. Wads of cash. But it has gone through all but about one-tenth of its cash, leaving this ~$1 billion market cap company with a trifling $3.8 million in cash.

Here's how the cash, working capital and debt have worsened, according to the annual report:

(Source: Company SEC filing)

Anyone possessing a scintilla of logical thought would be constructing a war chest right now both to fund the game plan and as a defense against the future deflation of the apparent building bubble. So a potentially dilutive stock offering or capital raise of some sort could be looming.

Investors will not sit still and let US Concrete measure them for concrete shoes. This stock appears on the verge of screaming down to about $31 per share - still an extremely fair valuation.

* Important Disclosure: The owners of TheStreetSweeper hold a short position in USCR and stand to profit on any future declines in the stock price.

* Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to scolberg@thestreetsweeper.org.

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