United States Lime & Minerals, Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

United States Lime & Minerals, Inc. (USLM) is a manufacturer of lime and limestone products, serving primarily the construction, steel, industrial, and environmental markets.

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.

USLM’s business is fundamentally tied to the cyclicality of construction and industrial demand, making consistent high performance reliant on these sectors. While having some barriers, this reliance reduces it’s ability to obtain large moats.

Business Overview:

Revenue Streams: USLM operates in two main segments: Lime and Limestone.
- Lime: Lime products are used in the steel industry for refining, in construction for soil stabilization, and in environmental applications for water and flue gas treatment. They are also used in various chemical processes. Prices tend to be a bit higher here.
- Limestone: Limestone is primarily sold to construction, concrete, and highway building markets, as aggregate. It has a much higher volume and lower pricing.
Geographic Presence: USLM has operations primarily in the south and southwest of the United States, with facilities concentrated in Texas, Oklahoma, Colorado and Arkansas. This gives them an advantage in the region by lowering the cost of transportation.
Competitive Landscape: The lime and limestone industry is relatively consolidated and competitive. There are a few large national players, such as Martin Marietta, and a number of smaller regional players. Competition is primarily based on price, quality, and service. There isn’t a huge difference in the product itself. There is a large dependency on being closest to their customer bases due to transportation costs, and this has created regional competitors which often have a natural advantage in their local area due to location.
What Makes USLM Different? Unlike other companies, USLM has access to high purity and a unique quality of limestone, which allows them to sell at higher premiums. They also have a well diversified client base, across multiple industries. They also have a good distribution network, allowing them to keep the transportation costs of their raw materials low. They are also highly leveraged, having invested in their facilities and mines, which creates efficiencies and reduces costs.
Trends in the Industry: The lime and limestone industry is primarily driven by construction and infrastructure spending. Therefore, growth is tied to infrastructure spending and other macroeconomic conditions. In addition, there is growing demand for environmental applications of lime due to stricter environmental regulations, although they have had limited benefits for USLM as most of these regulations affect industries other than the ones served by USLM. There has been some interest in lower carbon cement, which will use less limestone.
Margins: As stated above, the lime business offers higher margins than the limestone business.

Recent Concerns/Challenges:

Increased operating expenses, especially for diesel fuel, and explosives. Some of this has been passed on to the customer through price increases, but the full costs have not yet been fully absorbed.
Labor shortages and difficulties in finding and retaining skilled workforce.

Financial Deep Dive:

Revenue: For the first nine months of 2023, USLM reported a revenue of $278.2 million. For the same period of 2022, USLM had a revenue of $243.7 million. This shows an increase year over year, but with fluctuations in their individual quarters, meaning that quarterly performance may vary. The increase in revenue from 2022 to 2023 was mainly due to better volumes and prices. However, the company is not seeing prices rise as quickly as the costs do.
Gross profit: USLM reports a gross profit of $100.8 million for the first nine months of 2023, as opposed to $74.4 million in the same period of 2022. Similar to the revenue increase, there is a good increase year over year, but quarterly performance varies.
Operating Profit: The company had an operating profit of $52.2 million and $29 million in the first nine months of 2023 and 2022, respectively. This also showcases a positive trend, similar to the previous two metrics.
Net Income: For the first nine months of 2023, USLM reported a net income of $43.3 million, while for the same period of 2022, that was $20.1 million. This is a strong increase.
Operating Cash Flow: The company’s operating cash flow was $65.4 million compared to $45.9 million in the same period of 2022. Again a strong increase.
Profitability Analysis: Overall profitability seems good, with increasing revenues, gross profits, operating profits, and net incomes, however, cost increases have been faster than the increase in prices. This could be a negative sign, and they will need to adjust their prices accordingly to maintain their profit margins.
Balance Sheet: The company’s balance sheet has around $182 million in current assets (including $143.8 million in cash and equivalents), while total assets are around $383 million. Liabilities are at around $122.7 million, with the vast majority of it being short-term. Overall, this seems like a healthy balance sheet with low leverage and good solvency.

Moat Analysis:

Intangible Assets: USLM has some brand recognition, particularly in the regions where it is most active. They also have access to high-quality, high-purity lime and limestone quarries. These aspects could be used as part of the moat.
Switching Costs: These are high in industries such as steel, however they aren’t as high in the construction sector. The auto-parts and aerospace industries, which require highly specialized parts, have more lock-in.
Network Effect: There is no network effect present.
Cost Advantages: USLM has cost advantages related to operating primarily in a region that benefits from good access to raw materials as well as regional markets. They are well diversified, which should give them cost efficiencies. They have also shown high growth in previous years and have increased investment in facilities, which allows them to reduce costs. Moat Rating: 3/5
USLM has some key components of a moat. It has good cost advantages due to owning quarries. It has high switching costs with steel and other industrial customers, a regional advantage due to location, and a quality premium on its product. All these things combined create a decent moat, but one that isn’t strong enough to garner a higher moat rating.

Moat Risks and Business Resilience:

Economic Cyclicality: As a company that serves industrial sectors, USLM’s success is highly tied to economic cycles, especially in construction and infrastructure spending. The company was significantly impacted in 2008-2009 as a result.
Competition: The company faces competition from other lime and limestone producers, many of whom are regionally based. If they have to compete primarily on price, they will experience lower profit margins.
Price and Input Costs: The company is sensitive to input costs such as transportation and fuel. In the event of high oil prices, the company could see lower profit margins.
Environmental Regulations: Although new environmental regulations could help the demand for their lime products, they could also make their operating costs higher as a result of regulations.
Technological Innovation: New technologies, that could change the way steel or other key products are produced, could also harm the demand for USLM’s products. This is unlikely to happen in the near future, but may be something to consider.
Customer Reliance: Many customers rely on large volume sales and short term contracts. This makes the business a bit more vulnerable, as clients can switch at any time.

Business Resilience

Strong Financials: USLM’s strong financial position and low leverage provides great cushion and flexibility to operate through tough conditions.
Diversified Clientele: Their presence in different markets, will allow them to withstand one part of the economy having issues.

Understandability Rating: 2 / 5

While the core business of extracting and selling raw materials is relatively simple to grasp, the company’s financial reporting, and its position within the economic cycles, needs thorough study for a complete understanding.

Balance Sheet Health Rating: 4 / 5

USLM has a strong and healthy balance sheet with low leverage. They also have high liquidity, which makes them a relatively safe investment.