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Sizing Up Summit Materials (NYSE:SUM)

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The following analysis was presented exclusively to Insiders Forum members one month ago. The recommended stock in question has risen just over 10% over that time. However, since the shares still appear poised for upside over the longer term, we update our original investment thesis and present that research in the paragraphs below

One of the themes I have been playing successfully over the past two quarters is betting on an improving housing market given low mortgage rates and an exodus out of the larger cities in the United States post the COVID-19 pandemic. I recently opened a new position via covered calls in a new equity that should benefit as this theme continues to play out. A full investment analysis and recommended option strategy follow in the paragraphs below.

Company Overview:

Summit Materials, Inc. (SUM) is a Denver-based construction materials company, providing its end users with 54.0 million tons of aggregates, 2.4 million tons of cement, 5.5 million cubic yards of ready-mix concrete, and 5.6 million tons of asphalt paving mix in its fiscal year (FY) ending December 28, 2019. These materials and products are produced across its more than 400 sites and plants in 22 states and British Columbia, which hold ~3.9 billion tons of proven and probable aggregate reserves. Summit was formed in 2009 and went public in 2015, raising net proceeds of $433.0 million at $18 per share. Its stock currently trades just above $19.00 with an approximate market cap of $2.25 billion.

Industry

Owing to transportation costs and physical constraints inherent in its products, the construction materials industry, for the most part, is highly fragmented and localized. There are ~1,465 companies operating ~3,710 aggregates quarries, ~5,500 ready-mix concrete plants, and ~3,500 asphalt paving mix plants in the U.S. The one exception is the small number of cement factories: ~91, of which Summit operates two. As such, with relatively undifferentiated products, companies compete primarily on price.

Business Approach:

With those industry parameters, it makes sense that Summit grows through acquisition – which it has, purchasing over 70 businesses since 2009. In addition to macroeconomic factors, the company considers its post-acquisition position in the local market as a litmus test for a potential takeout target. If the business under evaluation will immediately place Summit in the top three in the local market or improve an already established top three position, it is a candidate for purchase. Management believes a top three ranking provides economies of scale and synergies, which support competitive pricing, profitability, and organic growth. In addition to acquisitions, Summit develops greenfield and brownfield sites in its existing markets. These strategies have allowed the company to grow its top line from $400 million in 2009 to $2.2 billion in 2019, becoming a top 10 supplier of aggregates and a top 15 cement producer.

Source: Company Presentation

Reporting Segments

Summit conducts its business through three operating segments: West, East, and Cement.

The West segment serves markets in nine states – including Texas and Arkansas – and British Columbia. It controls ~1.1 billion tons of proven and probable aggregate reserves as well as $610.6 million of hard assets (property, plant & equipment), accounting for FY19 revenue of $1.12 billion, or 51% of its total; and 40% of the company’s operating income.

The East segment includes operations in nine states covering the midwest and eastern sections of the country, which contain ~2.3 billion tons of proven and probable aggregates reserves and hard assets of $729.0 million. This unit was responsible for FY19 revenue of $809.1 million, or 36% of total; and 37% of its overall operating income.

Cement has an operating footprint in seven states along the Mississippi River, with two large cement plants and nine distribution centers. Its locations along the Mississippi are at a strategic advantage, allowing them to transport ~63% of their cement by barge. This segment holds 0.5 billion tons of proven and probable aggregates reserves and $600.8 million of hard assets, while generating FY19 revenue of $290.7 million, or 13% of total; and 23% of its total operating income.

From an end-user perspective, public infrastructure represented 38% of FY19 revenue with private construction (both commercial and residential) accounting for the balance.

Source: Company Presentation

From a state-by-state perspective, Texas (22%), Kansas (13%), Utah (12%), and Missouri (10%) markets accounted for 57% of the company’s FY19 top line.

Recent Stock Performance

As such, Summit’s operational performance is dependent on its pricing power for its materials and products versus the input, freight, labor, and fuel costs, which are functions not only of the overall economy but also of the economies and public infrastructure projects in its biggest markets – and sometimes weather, politics, and pandemics.

Shares of SUM traded as high as $24.50 (intraday) in mid-February 2020 after the company posted a strong 4Q19 with the economy expected to hum along and hopes of an infrastructure bill passing to replace the Fast Act sometime before its expiration (September 30, 2020). Then coronavirus panic cratered its stock to $7.51 (intraday) in March as the market assumed that its construction end markets would shutter causing both a lack of demand and consequent pricing pressures on its products.

2Q20 Results:

However, that has yet to materialize. After posting an in-line 1Q20 with a revenue beat of 10.4% that featured organic average selling price growth of at least 2% in all four of its materials and product categories, Summit produced another excellent quarter in 2Q20. The company announced non-GAAP EPS of $0.50 on revenue of $575.2 million versus $0.31 on revenue of $552.6 million in 2Q19, representing 61% and 4% improvements while beating Street estimates by $0.26 a share and $28.1 million (5%), respectively. Adj. EBITDA in 2Q20 increased 14% to $160.2 million while organic average selling prices and organic sales volumes increased for three of its four materials and product categories. Gross margins rose across the board versus the prior-year period.

Source: Company Presentation

Summit was helped by good weather in Utah and Kansas and hurt by an April 2020 explosion at one of its two cement plants, which was responsible for most of the sales volume drop for that product. It was also aided by the fact that construction was considered an essential function during the COVID-19 outbreak, leaving its business activity relatively unaffected to date.

Source: Company Presentation

Summit elected not to provide any guidance for Adj. EBITDA going forward, only stating that capex would remain in a $145 million to $160 million range for FY20, of which greenfield projects would account for $50 million to $60 million of the spend. Predominantly all the non-greenfield spend occurred in July 2020 with the $92 million acquisition of Multisources Sand & Gravel, making Summit the leading aggregates supplier in the Houston market.

Balance Sheet & Analyst Commentary:

Despite all the uncertainty surrounding the U.S. economy, seasonally impacted Summit emerged from 2Q20 in the best financial shape of any 2Q in the company’s history, with its leverage ratio improving significantly to 3.5x versus 4.7x in 2019 while boasting ~$580 million of available liquidity, of which $253.4 million was cash. Available liquidity dropped to ~$490 million and leverage increased to 4.3x with the acquisition of Multisources.

The company then completed a successful refinancing of its $650 million 6.125% Senior Notes due 2023 with $700 million 5.25% Senior Notes due 2029 in August 2020. In addition to saving Summit more than $3 million in annual interest payments, the transactions pushed out its earliest major debt due date to November 2024, when ~$621 million of senior secured term loans come due. Overall, the company holds slightly over $2 billion in debt.

Owing to its growth-by-acquisition strategy, Summit does not pay a dividend or repurchase shares.

The Street is coming around on Summit, providing four upgrades since July 2020. Overall, there are nine buys and two outperforms versus three hold and one sell rating. Their median twelve-month price target is just north of $22 a share.

Concurrent to the company’s 2Q20 earnings release, it was announced that Founder, President and CEO Thomas Hill would be stepping down from his roles effective September 1, 2020, replaced by Anne Noonan. She wasted no time putting her personal capital to work, investing $1 million into shares of SUM at $15.24 on September 4th, 2020.

Verdict:

Curiously, shares of SUM initially traded lower after its 2Q20 earnings release on July 21st, from over $18 to below $15. With the residential housing market likely to see a spike from the mass exodus from Northern cities currently transpiring throughout the country and public infrastructure tailwinds in two of its major markets with Kansas passing a ten-year, $10 billion transportation bill and Utah authorizing a sales tax on gasoline and diesel that should generate $170 million annually for transportation infrastructure, the immediate future doesn’t look ominous. Passage of a federal infrastructure bill seems unlikely with the election less than 50 days away, but at some point, the entire construction materials group will get a bump when a compromise is reached.

The company won’t provide any financial outlook until its 3Q20 earnings report, but the new CEO may have tipped her hand on what she anticipates, and the market has followed her lead, rallying Summit’s stock more than 20% from her purchase price. There is still plenty of time to follow the insider in our opinion especially using a simple covered call strategy which is how I have been deploying ‘dry powder‘ into the market throughout 2020.

Bret Jensen is the Founder of and authors articles for the Biotech Forum, Busted IPO Forum, and Insiders Forum

Author’s note: I present an update my best small and mid-cap stock ideas that insiders are buying only to subscribers of my exclusive marketplace, The Insiders Forum. Our model portfolio has more than doubled the return of its benchmark, the Russell 2000, since its launch.  To join our community and gain access to our market beating returns, just click on our logo below.

Disclosure: I am/we are long SUM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





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Stock Markets

Dow Slumps as Record Surge in Infection Triggers Bloodbath By Investing.com

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© Reuters.

By Yasin Ebrahim

Investing.com –The Dow fell sharply Monday, paced by a rout in value stocks on fears the recent spike in Covid-19 infections could weigh on the economic recovery amid fading hopes for U.S. stimulus before the election.

The fell 3.32%, or 942 points. The was down 2.86 %, while the fell 2.77%.

Coronavirus infections in the U.S. hit a record, adding more than 85,000 through Saturday, Bloomberg reported, after surpassing the previous record on Friday of 83,757 new cases.

Little sign of progress on stimulus talks, meanwhile, dimmed expectations the economy would receive a fiscal boost before the U.S. election on Nov. 3.

House Speaker Nancy Pelosi is reportedly waiting for another counteroffer from Treasury Secretary Steven Mnuchin, but as there remains sizable disagreement over key issues “reaching a deal ahead of the November election appears improbable, if not entirely impossible,” Stifel said in a note. Pelosi is reportedly set for further talks with Mnuchin at 2:00 PM ET (1800 GMT).

Energy and industrials led the move lower in value stocks, with the latter down on heavy selling in airline stocks as the spike in cases raised concerns that restrictions to curb infections could prompt airlines to cut capacity further. 

American Airlines (NASDAQ:) and Delta Air Lines (NYSE:) were down more than 7% while United Airlines Holdings Inc (NASDAQ:) slumped 8%.

Financials gave up some of their gains from last week as banking stocks were abandoned after Treasury yields reversed sharply, with down 5%.

JPMorgan Chase (NYSE:) and Bank of America (NYSE:) fell 3%, while Citigroup (NYSE:) slipped more than 2%.

Tech, which had led the rally since the mid-March bottom, added to the broader market selloff, with the Fab 5 nursing losses.

Amazon.com (NASDAQ:) and Apple (NASDAQ:) were down about 1%, while Facebook (NASDAQ:), Google-parent Alphabet (NASDAQ:) and Microsoft (NASDAQ:) fell more than 3%.

Facebook, meanwhile, said it would launch a game streaming service to rival Google’s cloud gaming service Stadia.

Positive news on the vaccine front from AstraZeneca, meanwhile, did little to keep losses in check.

AstraZeneca PLC ADR (NYSE:) rose more than 1% after the company said its coronavirus vaccine candidate had triggered an immune response in both younger and older adults.

On the economic front, the rapid growth in housing activity slowed in September, with some warning of further slowing to come.  fell to 959,000 last month from 994,000 a month earlier, missing forecasts of 1 million.

“The single-family housing market is still registering strong demand … however, record-low supply is pushing up prices even faster, which is hindering potential buyers from affording new homes,” said Grant Thornton Economist Yelena Maleyev. “This will be exacerbated by the lack of additional COVID-19 support from Congress; the scars of this recession will run deep,” Maleyev added.





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Wall Street extends slide on virus worries, elusive stimulus deal By Reuters

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© Reuters. FILE PHOTO: The Wall Street sign is pictured at the New York Stock exchange (NYSE) in the Manhattan borough of New York City

(Reuters) – U.S. stocks extended their slide on Monday, setting the Dow for its worst day in more than seven weeks, as soaring coronavirus cases and a deadlock in Washington over the next fiscal relief bill raised concerns over the economy and corporate earnings.

At 12:17 p.m. ET, the was down 731.56 points, or 2.58%, at 27,604.01, the S&P 500 was down 70.49 points, or 2.03%, at 3,394.90, and the was down 188.60 points, or 1.63%, at 11,359.68.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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Wall Street Lower on Virus Surge, Stimulus Impasse; Dow Down 631 Pts By Investing.com

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© Reuters.

By Geoffrey Smith 

Investing.com — U.S. stock markets opened weakly on Monday and sank through the morning session, on fears that a third wave of the coronavirus pandemic will push back the day when economic life can get back to normal. Failure by politicians in Washington to make any progress in passing a support package to bridge the gap until that day has also weighed on sentiment.

By 11:13 AM ET (1513 GMT), the was down 631 points, or 2.2%. The index was down 1.8% and the was down 1.5%.  All three indexes have now been trending downward for the last two weeks. 

The U.S. is clearly experiencing a third wave of the pandemic with just a week to go before the election. Hospitalization rates have risen by around half over the last month to their highest since August, while the seven-day moving average for deaths has been trending up for nearly two weeks. Whether the economy has adapted enough in the last six months to ride out the new wave seems open to question, with initial jobless claims still running at nearly 800,000 a week.

Airline and cruise stocks were conspicuous early fallers, with United Airlines (NASDAQ:) stock falling 3.8% and American Airlines (NASDAQ:) stock falling 3.3%

Various software stocks came under pressure after German enterprise planning giant SAP slashed its short- and medium-term outlook for profitability, as the pandemic weighs on business spending and accelerates transition to the Cloud – an area where SAP’s margins are lower than in its legacy business. SAP (NYSE:) ADRs fell over 20%, while Salesforce (NYSE:) stock, exposed to many of the same factors, fell 1.4%.

Elsewhere, Dunkin Brands Group (NASDAQ:) stock rose 14.8% to a new all-time high after it said it was in early talks to be acquired by Private Equity group Inspire Brands, which already owns the Arby’s and Buffalo Wild Wings restaurant franchises.

The moves came on a day when the biggest deal in world stock markets was taking place far away, as Chinese financial services giant Ant Group priced its initial public offering to raise some $34 billion on the Hong Kong and Shanghai stock exchanges. 

The IPO is a reminder of the growing distance between U.S. and Chinese capital markets: Ant’s founder, Jack Ma, had listed his Alibaba (NYSE:) group on the New York Stock Exchange only six years earlier, but such moves have been complicated by U.S. regulatory moves, as part of a general move to tighten Chinese access to U.S. capital and technical expertise. 

Overnight, China had announced sanctions against Boeing and Lockheed Martin in response to a U.S. deal to sell arms to Taiwan earlier this year. Boeing (NYSE:) stock fell 2.6%, while Lockheed (NYSE:) stock fell 2.6% to a three-month low.

Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.





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