What a return for investors who had bought Las Vegas Sands at $2.00 per share not too long ago. The same goes for a broad range of investors who enthusiastically purchased US equities back in mid 2009. LVS comes to mind specifically because several friends of mine were attracted to the options at the time. Unbelievable. So, what could possibly be next?
I have a strong belief that Total Construction Spending (TCS) has bottomed, or is definitely poised to and over the next decade or so, will emerge stronger than ever. It could have bottomed as of February 2010 but we will have to wait until the beginning of May to see if there is an uptick in TCS for March 2010. With the US equity markets bottoming back in March 2009, most average investors would postulate that they missed the move and that equities have risen too much in too short of a time so there must be some correction soon. Forget that psychology. Instead, consider an area that is potentially in the same spot as the Dow Jones was in March of 2009, construction that is.
Total Construction Spending month over month has still been declining. In September 2007, TCS was just over $1 trillion. In March of 2009 (again, when the US equity markets bottomed), TCS was about $966 million and as of February 2010, $846 million. Nonetheless, Building Permits which are known to economists as a leading indicator and heavily tied to residential construction, bottomed back in April 2009. Most significantly, residential construction, which makes up approximately 45% of TCS, appears to have bottomed as well back in June 2009.
So for the investor, what does this all come to? Consider U.S. Concrete (ticker RMIX), a cement company that sells ready-mixed concrete in bulk and other concrete related products. From their 2009 annual report filed with the SEC, 19% of their sales derived from residential construction and the remainder, 55% and 26% from commercial/industrial and street/highway construction, respectively. I discussed residential construction and the potential fact that it has bottomed. Commercial construction on the contrary, is still in its worst shape. Nonetheless, street/highway construction appears not to really have bottomed, yet from January 2002 to February 2010, on a monthly basis, has had a median of about $68 million and an average of $69 million. For February of 2010, street/highway construction spending was just under $80 million and on average, makes up about 7% of TCS. So despite the fact that TCS is still in its worst form, residential construction appears to have bottomed, highway/street construction seems healthy, but the worries in commercial/industrial construction spending still thrive.
To compensate for the weakness in commercial/industrial construction spending, which is responsible for approximately 7% of TCS, arguably could be offset by Timothy Geithner's recent remarks on "Meet the Press" where he stated that the economy is growing faster than the Obama Administration had anticipated and that existing signs should reimburse Americans with confidence in our economy. So if TCS is at such depressed levels, with everything said, maybe it would be a unique time to consider something like a U.S. Concrete.
On the corporate finance side, U.S. Concrete is buried in debt. That clearly explains why its equity value per share trades under $1.00. In short, majority of that debt does not come due until 2014 thus giving them more options in terms of a restructuring and time to still return to profitability! Consider YRC Worldwide (YRCW). A trucking company that did restructure and was thought by many to have gone under and that profitability was not really deemed accurate for the company in the near term. However, on April 8, 2010, YRCW provided its first quarter update. Total shipments per workday were up month over month from January 2010 and CEO, Bill Zollars acknowledged his confidence in the company's ability to produce positive EBITDA for the second quarter. U.S. Concrete could see a similar case. Now, with TCS at its weakest and not purely from the segments that really matter to U.S. Concrete, perhaps now could be an amazing opportunity.
Clearly, U.S. Concrete is not your typical blue chip and for individual investors considering building a position, your own research and assurance is most warranted. In conclusion, my analysis has led to me believe TCS is at its bottom/near to it and U.S. Concrete is the way to go for the next decade or so. Once TCS has bottomed, profitability for U.S. Concrete can be closer than most would have thought.
Full disclosure: Long RMIX at time of writing
