$SUM - Summit Materials Inc. Stock Analysis:
$SUM - Summit Materials Co. is one of the fastest growing construction material companies in the USA. Summit is a single-source provider of construction materials across 21 states in the USA and in British Columbia (Canada). Summit provides aggregates, ready-mix concrete mix, and asphalt mix.
Summit has been able to fuel their high growth rate through a rich history of acquisitions, which will be discussed later in this analysis.
Over the past 4 years (since January 2018), Summit has acquired 20 companies. Most of these companies are regional aggregate, concrete and/or asphalt providers, however, their desire to expand into a variety of new markets will help them to build a nation-wide service base and continue their growth over the next decade or so.
Furthermore, you may have noticed that Summit has a whopping level of debt that totals $1.6B. This figure is very significant when comparing it to other items on their balance sheet. However, we know that much of this debt is coming from financing In order to feed their acquisitions. This type of debt is not worrying to investors as long as Summit can continue to grow their revenues and EBIT at a high rate (to slowly chip away at their debt as they continue to acquire others). One article that I found that explains this well from when examining Summit can be found here.
In order to undergo the comparable analysis, we need to get an idea of their closest competitors. These competitors must operate in the same space, operate in similar geographies, be of similar market cap, and have valid financial ratios. Using this criterion, I cam up with the following.
- $VMC - Vulcan Materials Company: Vulcan Materials produces/supplies construction aggregate in the United States. It operates through four segments: Aggregates, Asphalt, Concrete, and Calcium. The Aggregates segment provides crushed stones, sand and gravel, sand, and other aggregates for construction/maintenance of highways, streets, and other construction projects. The Asphalt Mix segment offers asphalt mix and engages in asphalt construction paving activity. The Concrete segment provides ready-mixed concrete, and the Calcium segment mines, produces, and sells calcium products for the animal feed, plastics, and water treatment industries.
- $MDU - MDU Resources: MDU Resources engages in the regulated energy delivery, and construction materials and services businesses in the United States. The company's Electric segment generates, transmits, and distributes electricity for residential, commercial, industrial, and municipal. Its Natural Gas Distribution segment distributes natural gas for residential, commercial, and industrial customers. The company's Pipeline segment provides natural gas transportation and underground storage services. Its Construction Materials and Contracting segment mines, processes, and sells construction aggregates; produces and sells asphalt mix; and supplies ready-mixed concrete. This segment is also involved in the sale of cement, liquid asphalt, finished concrete products, and other building materials and related contracting services.
- $EXP - Eagle Materials: Eagle Materials produces and supplies heavy construction materials, light building materials, and materials used for oil and natural gas extraction in the United States. It operates in five segments: Cement, Concrete and Aggregates, Gypsum Wallboard, Recycled Paperboard, and Oil and Gas Proppants. The company engages in the sale of ready-mix concrete; mining, extracting, production, and sale of aggregates, including crushed stones, sand, and gravel; and mining and sale of sand used in hydraulic fracturing, such as frac sand. Its products are used in commercial and residential construction; public construction projects; projects to build, expand, and repair roads and highways; and oil and natural gas extraction.
- $SMID -Smith-Midland: Smith-Midland Corporation, develops, manufactures, markets/sells, and installs precast concrete products primarily for use in the construction, highway, utilities, and farming industries. It offers SlenderWall, a lightweight construction panels for the exterior walls of building; Sierra Wall that provides sound and sight barrier for use alongside highways around residential, industrial, and commercial properties; J-J Hooks highway safety barriers for use on roadways to separate lanes of traffic in construction work zone or traffic control purposes; and Easi-Set precast building and Easi-Span expandable precast buildings for use in housing communications operations, traffic control systems, and mechanical and electrical stations. The company also provides Easi-Set utility vaults for house equipment, such as cable, telephone, or traffic signal equipment, and for underground storage, as well as custom-built utility vaults for special needs; SoftSound soundwall panels to absorb highway noise.
- Yearly Financial Performance (Good): In 2020, Summit Materials increased their net income by 131%, decreased their interest expense by 11%, had a tax benefit (paid no tax), increased their EBITDA by 10%, and increased their gross profit by 7.6%.
- Yearly Financial Performance (Bad): In 2020, Summit Materials had a fantastic financial performance and there were not very many “bad performances”. The only poor results that I could find was their General and Administrative expenses rose by 12.2%
- Q3 2021 Financial Performance (Good): In Q3 2021, Summit Materials managed to increase their total revenues by 7.4% QoQ while only increasing their COGS by 4.1%. By increasing their revenues by more than their costs, Summit was able to increase their gross profit, and thus increase their gross margins which is great. Furthermore, Summit was able to keep their increase in their operating expenses to 0.7% QoQ, which translated into their highest ever quarterly Operating Income figure. Lastly, Summit was able to increase their EBIT by 20% QoQ which is fantastic.
- Q3 2021 Financial Performance (Bad): In Q3 2021, Summit did not report many “poor results” as Q3 was a very good quarter for them. The only negatives that I could take away from their earnings release were a 3.5% increase in total expenses, and a 24% increase in interest expense (however this is due to their debt funding for some of their acquisitions).
- Acquisitions: In 2020, Summit Materials reportedly spent $123.9M on their 3 acquisitions. Furthermore, in the first half of 2021 Summit Materials spent $8.4M on acquisitions.
- Shares Outstanding: In 2020, Summit increased their shares outstanding by approximately 1%, to 114.39M shares outstanding. For a company that is acquiring 3-4 companies per year, a 1% shares outstanding increase is very good, and shows that they are funding these acquisitions with debt financing rather than equity financing (which is beneficial for the company and their shareholders, as long as they are able to meet their debt obligations.
Comparable Analyses: (Spreadsheet found at the end of this analysis)
By comparing Summit Materials' financial ratios to that of their publicly listed competition (listed above in the “competitors” section) I found the following:
Based off of Summit Materials' P/E Ratio in comparison to their competitors, $SUM should be valued at $34.22/share, which would imply a share price decrease of 15%.
Summit Materials' PB/ ratio (compared to their counterparts) indicates that their fair value is $60.64/share, which would translate into a potential upside of 51.2%. This is very high, and contradicts the results achieved through the P/E ratio comparable, so I decided to undergo one last comparable.
Summit Materials' EV/Revenue ratio indicates that their fair value is $64.97/share, which would translate into an upside of 62%. This is once again quite high; however, it is in agreeance with the P/B ratio comparable, which is a good sign.
Based off of the above comparable analyses, I landed on one final (comparable) valuation of $53.28/share, which would imply an increase of 32%. This indicates that Summit Materials has a lot of room to move upwards over the coming months.
DCF: (Visualization found at the end of this analysis)
By inputting the necessary data into my DCF model, it arrived at a fair valuation of $SUM stock of $44.58/share, which implies a potential upside of 11%. Once again, this valuation method indicates that Summit Materials is undervalued and has plenty of upside room.
In order to provide simplicity, I wanted to come to one final, all-encompassing valuation for the $SUM stock. I did this through taking the average valuation of the Average Comparable, and the DCF model. By doing this I arrived at a price target for the $SUM stock of $48.93/share, which implies an upside of 21.9%.
My plan for an investment in the $SUM stock would go as follows:
- Enter into a position below the fair value, preferably close to $40/share.
- Hold long-term
- Re-evaluate the position as news, financials, and acquisitions are released.
- Construction is Cyclical and depends on a strong economy: Currently, there is great demand for new housing, apartments, and spaces in general. With the current interest rates being so low, there is an increased demand for construction, and the general outlook for the construction industry is great. However, things could change quickly if the interest rates start to rise with inflation (which is currently not happening for various reasons).
- Debt: Summit Materials is currently carrying a lot of debt, which can have serious consequences if Summit does not perform well financially. Currently, they are performing very well, and their level of debt is not too concerning as they will be able to pay it off with their increasing profitability. However, if things start to go south, and Summits growth starts to stall, they may not be able to meet their debt obligations, and things could get ugly for their shareholders.
- Financial Performance: In 2020 and Q3 of 2021, Summit Materials reported fantastic earnings and left few spots on their balance sheet in which they can improve upon. If Summit is able to sustain their current growth levels, they will be on track and potentially exceed my earnings projection in my DCF model, which will cause them to have a higher valuation, and my current price target to be undervaluing them. On a sidenote, analysts are forecasting a 22% CAGR for Summit (which is much higher than my gross profit growth rate of 9% in my DCF model.