Positions I’m Watching: Summit Materials (SUM)

By: Stacey Nickens

We are heading into third quarter earnings season, and analysts expect a steep decline in many company’s earnings. FactSet predicts the S&P 500 will report a 20.5% decline in earnings; however, this is a smaller decline than was initially predicted. The earnings improvement is due to estimated strengthening of the financial, consumer discretionary, and materials sectors. With this in mind, I would consider positions in the company Summit Materials.

Summit Materials is currently trading near fair value at around $19 per share. The company is likely poised for growth as residential housing starts continue to climb. An increase in residential construction has historically bolstered nonresidential construction development as well. Nonresidential construction growth that would further feed SUM’s coffers. With infrastructure spending likely to remain a bipartisan issue, Summit Materials could also benefit from continued government funding of roadwork and other infrastructure projects. These opportunities may make Summit Materials an exciting prospect for growth-oriented investors interested in smaller capitalizations.

With their focus on aggregates and cement, Summit Materials is theoretically less exposed to price volatility due to construction demand and cyclical changes. Aggregates account for around 40% of their gross profit and also provide the company some competitive edge. Due to transportation costs, aggregate material companies rarely face long-distance competition and often have strong competitive advantages in their localities. Additionally, not-in-my-backyard mindsets make it difficult for other companies to encroach on on aggregate companies’ spaces. All of this said, Summit Materials offers a fairly-valued stock that could present steady growth opportunities and could be somewhat shielded from volatility and profit-diminishing competition.

Interested in other investment opportunities? Review this analysis of the gaming company Zynga. 

Sources: Morningstar, FactSet

Disclosures: Past performance is not a guarantee or a reliable indicator of future performance. All securities carry a unique set of risks subject to a variety of factors. There is no guarantee that these investment strategies will work under all market conditions or that they are are suitable for all investors. This material has been distributed solely for informational purposes and should not be considered as individual investment advice or recommendation. Individuals should consult their investment professional prior to making an investment decision.