Spruce Point Capital Releases a Strong Sell Forensic Research Opinion on U.S. Concrete, Inc. (Nasdaq: USCR)
NEW YORK, May 17, 2018 /PRNewswire/ -- Report entitled "Concrete Evidence of Financial Scheming" outlines how U.S. Concrete faces 60%-90% downside risk or $6.00 to $25.00 per share as a result of the market's realization of rapidly diminishing liquidity, overstated organic growth and potentially aggressive accounting to inflate adjusted EBITDA.
- Déjà Vu Leverage Rising Again: USCR's Net Debt/EBITDA was 3.5x prior to the crisis sending it to bankruptcy, and is now 3.8x as of 3/31/18. USCR's current liquidity (cash and borrow capacity) as a percentage of LTM revenues stands at a multi-year and worse than pre-crisis levels.
- Evidence To Suggest Overstated Organic Growth: Evidence suggests organic growth is overstated, and mostly a function of pass through commodity price increases. We note realized prices by USCR hit a 5yr low in 2017, and have continued lower in Q1'18. We find average organic volume growth from 2015-2017 to be approximately zero.
- Vehicle and Truck Property Accounts Suggest Overcapitalization: Since 2012, USCR financials show ~500% growth in the vehicle property account, yet physical trucks are up only ~100%. USCR claims truck prices are stable, and we believe many have been acquired used through acquisitions, so overcapitalization of costs is a likely explanation. We estimate $60 to $85m of excess costs are capitalized in the vehicle accounts
- Aggressive Use of Capital Leases Growing Every Year: Capital leases flatter EBITDA and cash flow, providing incentives for management to favor capital vs. operating leases. Greater than 50% of capex spending now includes capital leases. While aggressively increasing capital lease usage, USCR has stopped disclosing leasing details in recent 10-K annual reports. There are numerous examples of truck and vehicle accounting scandals tied to lease accounting.
- Multiple Valuation Approaches Point To 60%-90% Downside: Given our analysis that shows distortions in USCR's Non-GAAP figures, we believe the best way to value the Company is on Free Cash Flow. We expect further deterioration which began three years ago, and apply a 20x – 25x multiple to reflect a discount to the peer average, above average exposure to ready-mix, poor roll-up economics, and growing liquidity risk. Secondly, we adjust USCR's book value for an estimated $60 - $85 million of overcapitalized costs to its vehicle property accounts and apply a 1.0x – 1.5x multiple range. These valuation perspectives indicate 60% to 90% downside or approximately $6.00 to $25.00 per share
The research report can be found on our website at sprucepointcap.com and updates will be posted on twitter @sprucepointcap.
Spruce Point Capital has a short position in U.S. Concrete (USCR) and stands to benefit if its share price falls.
About Spruce Point Capital
Spruce Point Capital Management, LLC, is a forensic fundamentally-oriented investment manager that focuses on short-selling, value and special situation investment opportunities.
