Credit Suisse Starts US Silica At Outperform, Says 'It Pays To Be Well Established'

• Shares of U.S. Silica Holdings Inc SLCA have been volatile in 2015 and are down 29 percent year-to-date.
• Credit Suisse’s James Wicklund initiated coverage of the company with an Outperform rating and a price target of $25.
• The company’s strong positioning should allow it to earn healthy margins, despite depressed volumes, Wikclund stated.

A strong positioning in the US frac sand industry should allow US Silica to earn a margin of $10-$20 per ton, provided the pricing environment remains normalized. Industry-leading logistics systems and a strong position should help the company in the current scenario where frac sand volumes remain depressed, analyst James Wicklund mentioned.

Wicklund believes that the 7 percent decline in US Silica’s shares in the last few days provides an attractive buying opportunity. He added, however, that the longer term economics of the fracs sand business and the shifting outlook for the OFS/oil markets remain concern areas.

US Silica’s shares are expected to move up over the next year as the market begins to discount an improving 2H16 over 1H16 and an improving 2017 over 2016, the Credit Suisse report stated.

“We model a -13% CAGR in US frac sand demand in 2014-17, while we model an +11% CAGR for SLCA, which assumes SLCA's market share increases from ~11% in 2014 to ~22% in 2017,” Wicklund wrote.

He mentioned further that US Silica’s structural cost advantage drives industry-leading margins. The company is expected to record a contribution margin of 18 percent in 2017, versus the 39 percent recorded by it in 2014.