Expanding Green America Recycling Fuels Growth And Optimizes Cement Strategy

Key Takeaways

• Strategic focus on portfolio optimization and value pricing is expected to enhance market positions and drive higher future margins.
  
• Operational improvements and synergy capture from acquisitions are projected to significantly boost earnings and EBITDA margins.
  
• Weather-related risks and demand uncertainty could limit revenue growth, while increasing costs and interest expenses pressure profit margins and earnings stability.

Catalysts

Operates as a vertically integrated construction materials company in the United States and Canada.

• Summit Materials is progressing with the Green America Recycling expansion at Argos USA plants, which is expected to enhance their cement platform and improve future revenue and earnings.
  
• The strategic focus on portfolio optimization, including divesting nonstrategic assets and making Aggs-oriented acquisitions, is expected to strengthen market positions and lead to higher future returns and net margins.
  
• The company’s value pricing strategy, which is driving double-digit pricing gains in aggregates and mid-single-digit gains in cement, is expected to sustain revenue growth and improve net margins in 2024.
  
• Operational excellence initiatives and productivity improvements are targeting significant cost savings, anticipated to enhance net margins and earnings going forward.
  
• Integration and synergy capture from the Argos USA acquisition are projected to drive $130 million in synergies, significantly boosting adjusted EBITDA margins and enhancing overall earnings.

Summit Materials Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Summit Materials's revenue will grow by 8.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.9% today to 12.3% in 3 years time.
• Analysts expect earnings to reach $593.0 million (and earnings per share of $3.54) by about November 2027, up from $147.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.3x on those 2027 earnings, down from 58.0x today. This future PE is lower than the current PE for the US Basic Materials industry at 24.3x.
• Analysts expect the number of shares outstanding to decline by 1.53% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.36%, as per the Simply Wall St company report.

Summit Materials Future Earnings Per Share Growth

Risks

• The company faces significant weather-related risks, which have resulted in lost volumes and higher costs, impacting EBITDA by an estimated $15 million in Q3 and potentially limiting revenue growth.
  
• Demand uncertainty, particularly in the private end markets, leads to cautious volume expectations which could constrain revenue growth and pressure net margins.
  
• Higher interest expenses and noncash depreciation, depletion, and amortization charges are affecting diluted earnings per share, raising concerns about future earnings stability.
  
• The potential for increased cost inflation in areas such as natural gas could pressure profit margins despite ongoing operational excellence initiatives.
  
• Market conditions such as fluctuating cement imports and price increases may not sufficiently mitigate lower volumes, presenting risks to revenue and earnings.

Valuation

• The analysts have a consensus price target of $52.55 for Summit Materials based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $60.0, and the most bearish reporting a price target of just $43.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.8 billion, earnings will come to $593.0 million, and it would be trading on a PE ratio of 18.3x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $48.68, the analyst's price target of $52.55 is 7.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.