If you’re looking for a company to hold for the next 4 years or longer to take advantage of all the infrastructure spending by the federal government then look no further than Summit Materials. Lomas Capital Management LLC recently increased its stake in Summit Materials, Inc. (NYSE:SUM) by 145%, according to its most recent filing with the Securities and Exchange Commission. According to Community Financial News, Metropolitan Life Insurance Co. also boosted its holding in Summit Materials by 78% in the second quarter last year. It would appear this stock is getting a lot of attention as volume has really picked up since the presidential election in November.
Summit Materials is a leading vertically integrated construction materials company. Last month the company announced that it has entered into definitive agreements to acquire Colorado-based Everist Materials, LLC (“Everist”) and Arkansas-based Razorback Concrete Company (“Razorback”), subject to customary closing conditions. Both transactions are expected to close on or before the end of the month. According to a press release, the materials-based acquisitions of Everist and Razorback collectively “bring aggregates operations with more than 100 million tons of permitted reserves” in their respective States, Colorado and Arkansas. Furthermore, it will also provide Summit with additional networks of vertically integrated ready-mix concrete and asphalt plants in growing public and private end-markets that are close to Summit’s existing operations. “The pending acquisitions of Everist and Razorback enable Summit to expand its integrated, materials-based model in growing markets throughout west-central Colorado and Arkansas,” said Tom Hill, CEO of Summit.“We are pleased to welcome the Everist team, along with accomplished leaders Kent and Keith Ingram and their team at Razorback, to the Summit family of companies. Both companies bring proven operations,high-caliber assets and long-established customer relationships that provide an ideal entry point into early-cycle markets where we see long-term potential for profitable growth.”
Although SUM may look like an expensive stock with a price to earnings ratio of 29 times at the moment, it is relatively in line the broader S&P 500 market index which has a P/E ratio of 26. However, SUM has a more attractive growth rate. According to the chart below from Reuters, we can see that Summit Materials is only trading at 18.2 time expected earnings for 2017 so although it isn’t cheap by any means, it’s still relatively a good point to buy assuming the investor will hang onto it for at least 5 years. Analysts are also giving the stock a Strong Buy overall.
Using the Graham Formula we can calculate the intrinsic value of the stock and compare that with its current market price, which is at roughly $24.14 as of closing on February 8th. Based on analysts’ estimates of 10.5% earnings growth over the next 5 years, we can see that SUM should be trading at about $30/share. This tells us that it’s possibly undervalued by 24% currently. Many analysts seem to have a similar bullish outlook for the company. According to Thomson Reuters, out of all the analysts covering the stock, the average 12 month price target is $28.20, which isn’t as high as the intrinsic value calculated by the Graham formula but the general direction is clear. Plus, we should keep in mind that out of the last four quarters there were 3 positive surprises and only 1 disappointing surprise based on earnings expectations. SUM has also been able to gain market share by growing revenues faster than the industry average. This trend continues from the previous year when revenue growth at SUM and the Construction Materials industry were 12.19% and 9.26%, respectively. Overall SUM would be an appropriate stock to add to a diversified portfolio for long term infrastructure exposure in the United States.
This author has 100 shares of Summit Materials Inc (SUM) as of writing this post.