The United States Department of Transportation announced a few days ago, on Wednesday, April 21, that there is now $48.8 billion in highway funds available to the states through the Hiring Incentives to Restore Employment (HIRE) Act. This significant sum of money will be disbursed throughout fiscal year 2010. For more information, visit http://www.dot.gov/. It is important to note, however, that a near 85% of the cement industry is controlled by international companies based outside of the United States (Eagle Materials 2009 10K). Regardless, Eagle Materials, Ready Mix, Texas Industries, and of course, U.S. Concrete (ticker RMIX) are among the few that are not headquartered outside of the United States.
In a previous post, I discussed how Total Construction Spending (TCS) either has bottomed or will within the next few months. Breaking down TCS, I touched on highway/street construction and acknowledged how its been rather strong relative to other segments that make up TCS. Arguably, if 85% of cement sales emanate from outside the United States, then 15%, or $7.32 billion (out of the HIRE Act) will be allocated appropriately to the four companies I named above and a pool of about 50 other American, non-public cement companies (I will not even consider that international cement companies lose market share). Average annual revenue for the four public companies I named is about $500 million. The 50 or so other cement companies' annual revenue on average is approximately $200 million. Even if the $7.32 billion was spread evenly among 50-55 cement companies, we are still looking at a near $140 million per company (disregarding other costs for now).
Evidently, U.S. Concrete seems poised to get more from the pie because they have the dynamic force to take on large scale projects in different states unlike some of the 50 other companies who operate solely in one specific area. Also, U.S. Concrete, whose 26% of 2009 revenue came from highway/street construction, worked on such related jobs: New Jersey Route 21, I-580 Emergency Freeway Repair, and the U.S. Census Bureau, the source where I get my construction data - just to name a few. One more interesting fact was that on April 14, 2010, U.S. Concrete was ranked #1 for efficiency measured by Revenue per Employee (RPE), obviously ahead of names like Eagle Materials and Texas Industries. According to IBD, analysts use this metric to compare companies' productivity. So when the HIRE Act funds are put to play, maybe the decision-makers will consider the efficiency measured by RPE data when determining what companies to use.
U.S. Concrete is below $1.00/share therefore making it a candidate for becoming a pink sheet, however, they still have time to get back above $1.00/share. With the HIRE Act coming into play, time on hand to restructure/negotiate debt terms, and TCS near bottoming (or bottomed), I firmly believe that U.S. Concrete again, seems like an amazing opportunity. As matter of fact, I do plan on doubling my position sometime in the weeks ahead. I will assume that U.S. Concrete, when they report on May 3, will give a positive outlook due to the fact that residential construction has bottomed and highway construction season is underway. Consider the following quote: "With spring and summer highway construction seasons just beginning, these funds will help make it easier for states to put people back to work and begin long-term projects.” -Dept. of Transportation Secretary Ray LaHood, April 21, 2010.
As noted, 26% of U.S. Concrete's 2009 revenue derived from highway/street construction. That number comes to about $139 million. When all other data is held constant and I assume that they do get at minimum, half of the $140 million that I earlier mentioned (to compensate for other construction costs), 2010 revenue would rise by roughly 13%. If I keep highway/street revenue constant at 26% of 2010 revenue after including money from the HIRE Act, with some simple algebra, U.S. Concrete's 2010 revenue comes to a near $803 million, a 50% increase compared to 2009 revenue. This assumption is not unlikely considering that the economy has turned the corner. The only worry here is commercial/industrial construction. Nonetheless, I feel that it will bottom very soon (or has at $44.6 million) and when there is that uptick in commercial construction spending from that $44.6 mil (the lowest point on a monthly basis in more than 10 years), I will promptly note it in a response to this post. In the end, if U.S. Concrete remains efficient and controls its costs, profitability could also be reasonable thus allowing the company to pay down debt and increase its equity value sooner than most would have thought.
Full disclosure: Long RMIX at time of writing.
