Today, I’m writing to you about cement and gravel — in my opinion, one of the easiest businesses to understand. And while there are few mysteries in this business, there are bigger economic factors in play. I came across this one concrete company when I was scanning the market for undervalued small-caps in beaten down sectors.

On paper, U.S. Concrete (RMIX: NASDAQ) is a great business. It’s making money, it buys out almost every other ready-mix concrete firm in its areas of operation and it has benefited recently from higher concrete prices.

The company operates ready-mix concrete facilities in California, New Jersey, Michigan and Texas. As of March, the company had 100 fixed and seven portable-ready mixed concrete plants, eight pre-cast plants, three concrete block plants and two quarries. During 2005, these facilities produced approximately 6.2 million yards of ready-mix, 4.8 million 8-inch equivalent block units and 1.6 million tons of aggregates.

U.S. Concrete has been buying up smaller firms like mad. In 2005, it spent more than $41 million buying out competitors. And in 2006, the company laid down a cool $165 million for Alberta Investments and Alliance Haulers, which brought in combined revenues of $181 million last year. This is an acquisition that could up U.S. Concrete’s revenue by 27% if it continues to perform.

Its valuation is very attractive as well. Its price-to-sales ratio is a slim 0.38. And it is trading for a little less than book value. Those are the kinds of numbers that could make any value investor jump at the opportunity to own shares.

So, all this makes U.S. Concrete a great buy, right? Wrong…

Residential construction — which is where U.S. Concrete gets more than 40% of its revenue — is slumping dramatically across the country. And U.S. Concrete has indicated that business is hurting due to shrinking housing demand, and that commercial construction won’t be able to pick up the slack. So as housing continues to unravel, U.S. Concrete could get hit hard.

In fact, the stock has already tumbled as the homebuilding sector has faltered. Just look at its performance for the past six months:

Now, I like out-of-favor companies just as much as the next smart investor, but the bigger economic picture is just too much to ignore in this situation. Even though this stock is beaten down, its bottom could be much, much lower. And after all, we want to catch these out-of-favor companies when they’re about to rise, not before they could get slammed again.

Best,
Gunner
October 30, 2006

Investing in Cement Companies was originally featured in the Penny Sleuth.