The market has been very rough on my Small Cap Watch List (Track at Marketocracy) this quarter. Obviously including Impac Mortgage (IMH - Annual report) on the list was not a good start, but the housing market isn’t the cause for all the woes – at least not directly. Pretty much everything is down and homebuilder NVR’s (NVR - Annual report)10% decline puts it among the top performers while furniture maker Tempur-Pedic (TPX) has turned in the best performance on the list.
In the bottom camp, however, has been another construction related stock – namely US Concrete (RMIX). Down nearly 20% since the end of June on the heels of a lowered outlook, it is starting to look ugly. The Zacks rank, which tracks earnings momentum, is the second-lowest possible rating. Free cash flow in 2006 was a big goose egg thanks to unusually high capital expenditures and the debt load now exceeds the market capitalization.
Still, the stock is also now trading with a single-digit P/E multiple and 7.6x EV/EBITDA multiple, both of which are reasonable. The market price is barely above book value and the price/sales is a measly 0.35x. The company also has more than $75 million in working capital, which is a double-edged sword. In a slowdown working capital could be reduced and boost cash flow – provided the customers to whom they sell the inventory and from whom they are owed receivables are able to stay in business too. Combining this with the fact that capital expenditures were abnormally high in 2006 suggests that the “normal” free cash flow is closer to the $25 million they realized in both 2004 and 2005.
My spirits rose a bit when I saw the 8-K they filed yesterday, saying:
On July 31, 2007, we entered into new Executive Severance Agreements with several of our officers, including the following “named executive officers” identified in our proxy statement relating to our 2007 annual meeting of stockholders: Michael W. Harlan, Robert D. Hardy and Thomas J. Albanese. The new agreements generally replace other agreements or term sheets previously agreed to between us and the applicable officers. Each Executive Severance Agreement provides for severance payments and other benefits following termination of the applicable officer’s employment under various scenarios, as described below. Each such agreement also contains a confidentiality agreement, requiring the applicable officer to maintain the confidentiality of confidential information we provide him, as well as a non-competition agreement that generally extends for one year after the officer’s employment terminates (subject to extension in the event of a change of control, so that the non-competition agreement will extend to cover the number of months used to determine the severance benefits payable to him (as described below)).
Could all the focus on a potential change in control signal that one may be in the works? It is possible. I think the odds of a private equity buyout are relatively low due to the fact that there is little room for additional leverage and the valuation already appears reasonable rather than cheap. Then again, the low market capitalization would make it an easy bite.
Still, I think that if there is to be a buyout it would probably come from a competitor who would have greater opportunity to cut costs through economies of scale. Yahoo! Finance lists six cement makers with market capitalizations of $2 billion or more - all of whom would also find US Concrete to be a bite-size addition to their current business.
Here’s hoping.
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