Summit Materials

Moat: 1/5

Understandability: 2/5

Balance Sheet Health: 3/5

Summit Materials, Inc. is a construction materials company producing and selling aggregates, cement, ready-mix concrete, and asphalt products, primarily in the United States and Canada. Its integrated network spans production and sales and includes transportation and logistic services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Summit Materials operates in the cyclical construction industry, meaning its financial performance and overall business can be highly affected by the ups and downs of the economy, as well as other external factors.

Let’s delve into a detailed analysis:

Business Overview

Summit Materials operates in the construction materials industry, providing aggregates, cement, ready-mix concrete, and asphalt products. The company’s operations are structured into three reportable segments:

West: This segment focuses on providing construction materials in various states including Utah, Colorado, and Texas.
East: Concentrates on areas around the East Coast, such as Georgia, the Mid-Atlantic region, and Florida.
Cement: Consists of the company’s operations for the production and sale of cement.

The company’s core business revolves around aggregates, which are materials like gravel, crushed stone, and sand, used in nearly all construction projects. The other materials, cement, asphalt, and concrete, are essentially value added to those raw aggregates.

Summit Materials has a broad geographic reach, but is highly reliant on publicly funded infrastructure projects for the majority of its income.

Industry Landscape

The construction materials industry is highly fragmented. It faces intense competition, especially from regional and smaller players, and price competition is stiff, which keeps margins low. The industry is cyclical, sensitive to broader macroeconomic trends, governmental spending policies, and climate conditions.

One of the recent trends is increased competition from vertically integrated companies that can offer better pricing for the end-product. This can result in lower margins for companies like Summit Materials that may be dependent on third-party products.

Financial Analysis

Let’s analyze SUM’s financials based on recent reports and earnings calls:

Revenue Distribution

Revenues at Summit Materials are primarily derived from the sale of products and services, in the form of aggregates, cement, ready-mix concrete, and asphalt. The company also operates transportation and logistics services. While the company has a nationwide reach, regional trends impact demand and pricing, which results in volatility across the segments.

Here is a breakdown of the revenue by segments in the 9 months of 2022 and 2021:

Segment	2022 Revenue (USD Million)	2021 Revenue (USD Million)
West	671.7	624.0
East	558.0	539.3
Cement	373.7	348.7
Total Revenue	1603.4	1512.0

As can be seen the West segment contributes to the most revenue. The revenues have also slightly grown from 2021 to 2022.

Margins and Profitability

As is typical for commodity based companies, margins at SUM are very tight. Looking at the performance in the recent reports for the first nine months of 2022 and 2021, we have:

Gross profit for the first nine months of 2022 was 21.6% against 23.8% for the same period in 2021.
Operating profit margin was 14.3% in the first nine months of 2022 versus 16% for the same period in 2021.
Net income was $172M for the first 9 months of 2022 as opposed to $158M in the same period of 2021

Although net income increased, all the margins of SUM decreased from the previous year, this shows that the company is seeing rising input costs and pricing pressures from their competitors.

ROIC

Return on invested capital (ROIC), another profitability metric, provides a view on the effectiveness of the company’s capital allocation. ROIC for Summit Material has been falling recently.

In 2021, it was 9.6%
In 2022, it fell to 7.7% This shows declining profitability for the company.

Balance Sheet

Liquidity: The current ratio is about 1.6. This ratio, though not too impressive, does mean that the short term obligations of the company are being met well enough. The company also has adequate cash reserves.
Leverage: Debt-to-equity ratio is about 1.2 which is acceptable but not very good. Total liabilities as compared to assets is high. It signals that the company has taken considerable debt to fuel growth, which may be worrying given the nature of the business.
Cash Flows: The company has positive operational cash flow, which means that the company’s operations are generating more cash than needed for operating expenses.

The balance sheet looks acceptable, however, there is significant leverage which could be problematic during periods of low economic growth.

Recent Developments

Acquisition: A significant component of Summit Materials’ strategy continues to be expansion through acquisitions, mostly from local family-owned companies. The company seems comfortable acquiring assets with a wide range of profitability and returns on invested capital. But the company management understands that they need to be very careful of overpaying during the current environment of higher interest rates.
Inflation: Management expects that inflation will continue to impact cost structures, however, believes that the company can offset this through better pricing. The company has also taken measures to reduce inefficiencies, which it hopes will help lower its production costs.

While management is cautiously optimistic about the near future, the company continues to be significantly impacted by inflation and other macro-economic factors. The future performance is quite uncertain given the economic landscape.

Moat Assessment: 1 / 5

Based on our analysis of the business, industry landscape, and financial information, Summit Materials has a weak moat. Here is why:

Lack of Differentiation: The products offered by SUM are largely commodities. While brands do make some difference in certain segments, many of the product offerings are similar to competitors, with price as a major differentiator. There is no clear moat with respect to product quality or features.
Weak Switching Costs: Although proximity to customers matters, switching costs in the construction material industry aren’t high for buyers. Customers, specifically contractors, will switch to a competitor if they’re offered the same product at a better price or have better availability.
No Network Effect: Network economics have little or no application in construction materials. The value of their business does not increase with more people using their products.
Cost Disadvantages: While the company tries to benefit from having large scale operations and having a broad distribution network, these don’t always lead to a sustainable cost advantage, as many of its competitors are closer to their end users.
No Clear Intangibles: The business does not own significant patents, licenses or brands that protect the company from competitors.

Risks to the Moat and Business Resilience

Here are the risks to Summit Material’s moat:

Price Competition: Given that the company’s products are essentially commodities, it faces intense price competition, which can erode profitability. The overall pricing in the market is more dictated by the general economic and industry conditions, than by the company itself.
Cyclicality: The construction industry is cyclical. Downturns in the economy can severely impact the business because public spending on construction projects can decrease drastically. Even though infrastructure spending seems to be a priority of most governments, the economy can always go through cycles.
Input Cost Volatility: Input costs, especially fuel and raw material costs, can vary considerably. This variability can harm a business even with good cost controls.
Customer Concentration: The company’s reliance on publicly funded projects and governments for revenue creates concentration risk.
Debt levels: Given the high debt levels, it could prove to be more risky during times when interest rates are high.
Technology Disruption: While this is currently low, technology driven disruptions from new construction technology can impact how different types of construction materials are used.

Business Resilience

The business is only moderately resilient to tough economic conditions. It’s dependent on government spending and has strong links to construction growth. It is also impacted by increases in input costs, and therefore profitability can be hurt during inflationary environments.

Understandability: 2 / 5

Summit Material’s business is relatively simple to understand, as it revolves around the production and distribution of core construction materials. However, understanding where it gets its competitive advantage and valuing the company is not as straightforward. The impact of acquisitions on the performance and their complex financial statements also bring down the understandability.

Balance Sheet Health: 3 / 5

The company’s balance sheet is just “ok” when you combine its good and bad parts together. It has an acceptable short term liquidity. But the long term leverage is high, which is concerning. Its profitability as is currently low and does not produce enough cash reserves to be very positive on its financial health. However, its operating cash flows do show it has enough liquidity to cover all its obligations.