The construction industry is one of the largest industries, not only in the US, but across the globe. On a planet filled with people and all of the needs that they have, significant infrastructure is a necessity. Naturally, a large number of players would emerge that would become dedicated to providing the goods and services required for this industry to thrive. One such player is a company called Smith-Midland Corporation (SMID). As a very small prospect in the space, it does offer a lot of upside potential should management succeed in growing the enterprise at a nice clip. But sadly, at this time, shares are probably no better off than being fairly valued. The actual absence of material growth in recent years, both on the top and bottom lines, combined with the trading multiple the company has, is indicative of a company that probably does not offer any further upside in the near term.
A small construction business
Smith-Midland focuses on developing and selling a variety of precast concrete products and systems. These are offerings that are typically used in the construction, highway, utilities, and farming industries. Examples of its portfolio include SlenderWall, which management describes as a patented, lightweight, and energy-efficient concrete and steel exterior wall panel that is used in the construction space. Another example is J-J Hooks Highway Safety Barrier, a highway safety barrier that the company has developed. Its SoftSound product acts as a sound absorptive finish that is used on the surface of sound barriers in order to absorb traffic noise. The company also sells a product called Sierra Wall, which is a sound barrier that is mostly used on the roadside. Its Easi-Set and Easi-Span offerings act as transportable concrete buildings. And Beach Prisms are essentially erosion mitigating modules. The company also sells precast farm products like cattle guards and water and feed troughs, amongst other miscellaneous offerings.
As the image above illustrates, the company’s revenue stream truly has become diverse in recent years. No one source of revenue accounts for more than 20% of overall sales. The largest chunk of revenue, using data from 2020, came from shipping and installment activities associated with its products. These accounted for 19.4% of overall sales that year. In terms of specific products, the greatest exposure for the company is to the soundwall offering that it provides. This made up 17.1% of overall revenue for the year. Not far behind it were barrier rentals, followed by barrier sales at 15.7% and 12.6% of sales, respectively.
In order to provide all of these products and services, Smith-Midland has to have a fairly sizable footprint. Today, the company operates three different manufacturing facilities, the largest of which is a 44,000-square foot plant located on 28 acres of land in Virginia. On top of this, the company owns 19 acres, also in Virginia, which is located about 2 miles from the operations facility that the company has. Three of those acres have been developed as a storage yard for the rental barrier portions of the enterprise. Its second manufacturing facility is 15,000 square feet and located on 46 acres of land in North Carolina. And its third manufacturing facility, totaling 40,000 square feet that sits on 39 acres, is located in South Carolina.
Over the past few years, the financial performance of the company has been somewhat mixed. Revenue has shown no true trend, which is slightly disconcerting. This can be illustrated in the chart below. The peak year was in 2019 when the company generated revenue of $46.69 million. But then, in 2020, revenue dipped slightly to $43.86 million. It is worth noting, however, that the data provided for the first nine months of the 2021 fiscal year has been encouraging. During that time, the company generated revenue of $40.63 million. This represents an increase of 23.9% over the $32.79 million generated the same nine months one year earlier.
Just as revenue has been uncertain, so too has profitability. Net income has ranged from a low of $1.69 million to a high of $2.84 million over the past five years. In 2020, the company generated profits of $2.67 million. Operating cash flow had a similar path, ranging from a low of $2.93 million to a high of $8.47 million. In 2020, the company generated cash flow of $7.49 million. Even EBITDA has been volatile, ranging from a low of $3.71 million to a high of $6.40 million, that last figure coming in during 2020.
With revenue rising in 2021, profitability has followed suit. Net income during the first nine months of 2021 totaled $7.55 million. That compares to $1.95 million generated one year earlier. Though this is great to see, it is worth noting that we should adjust for this because of $2.69 million the company received as a gain on the forgiveness of a PPP loan. Adjusting for taxes associated with this, profits for the year probably would have been $5.35 million. As net income rose, cash flow followed suit. Operating cash flow grew from $5.98 million to $7.51 million, while EBITDA expanded from $4.31 million to $5.60 million.
Management has not provided any real guidance for the 2021 or 2022 fiscal years. So it is difficult to know what to expect. What I did, then, was to extrapolate out financial figures for the rest of 2021 and, to be conservative, I also decided to compare the company relative to its 2020 figures. On a price-to-earnings basis, the company seems to be trading at a multiple of 19.4. This compares to the very high 53.3 if we rely on the 2020 data. In this calculation, I am factoring out the PPP loan forgiveness and adjusting for taxes for that. The price to operating cash flow multiple of the company is 15, down from the 19 if we relied on the 2020 figures. And the EV to EBITDA multiple of the business is 15.7, down from the 20.3 from 2020.
To put this all in perspective, I decided to compare the company to some other similar firms. On a price-to-earnings basis, these companies ranged from a low of 14.6 to a high of 37.5. Two of the five companies were cheaper than our prospect. I then did the same thing using the price to operating cash flow approach, ending with a range of 11.2 to 22.6. Three of the five companies were cheaper than our target. And using the EV to EBITDA approach, the range was 8.4 to 23.7. Three of the five companies were cheaper than our target in this regard.
Company | Price / Earnings | Price / Operating Cash Flow | EV / EBITDA |
Smith-Midland | 19.4 | 15.0 | 15.7 |
Forterra (FRTA) | 14.6 | 14.3 | 8.4 |
Summit Materials (SUM) | 31.4 | 11.2 | 11.2 |
Eagle Materials (EXP) | 19.3 | 12.2 | 12.2 |
Martin Marietta Materials (MLM) | 34.6 | 22.0 | 19.6 |
James Hardie Industries (JHX) | 37.5 | 22.6 | 23.7 |
Takeaway
Based on all the data provided, it looks a lot to me like the company is a solid business and it probably has a decent future ahead for it. Having said that, shares just don’t seem to excite me. The multiple is too high relative to the historical financial performance the company has achieved. One good thing for it is that it has cash in excess of debt of $11.87 million. That does drastically reduce the risk to shareholders of a failure of the enterprise. But that doesn’t do much to offer significant upside potential from here. In all, I would make the case that there probably are more attractive prospects to be had in this space, but I don’t believe that Smith-Midland is a bad company if you own it currently.