Citi Backs Up The Truck, Upgrades Summit Materials To Buy On Valuation

• Summit Materials Inc SUM shares have been trending south in recent months; and are down 28 percent since November 17.
• Citi’s Scott Schrier upgraded the rating for the company from Neutral/High Risk to Buy, while reducing the price target from $25.62 to $21.
• Summit Materials’ current stock valuation is attractive relative to its fundamentals, Schrier mentioned.

Analyst Scott Schrier expects Summit Materials’ revenues to increase at a +12 percent CAGR through 2017, with its margins likely to continue expanding due to the Davenport acquisition.

Summit Materials is poised to outperform, given the robust outlook for the heavy materials segment and the company’s experienced management team, which has a good track record of integrating acquisitions, Schrier commented.

Although Summit Materials’ vertically-integrated structure may put off some investors, the company expects a complete product offering to provide it with a competitive advantage in a highly fragmented and localized industry.

The Davenport acquisition has proved to be a “game changer,” doubling the company’s cement capacity in a tight market. Although the company’s EBITDA margins are marginally lower than those of its peers, the valuation gap with peers is likely to dissipate over time, the analyst said.

While Summit Materials’ shares have lost 37 percent from the high achieved 6-months back, the 2016 consensus EBITDA expectations have risen 3 percent over the same time period, despite concerns surrounding Texas and the overall economy, the Citi report noted.

Schrier expects Summit Materials to continue its focus on acquiring aggregates-based businesses and improve its overall margins.