I was one of the first analysts to pronounce this as the “Golden Age of Materials Science.”
You know what I’m talking about – all those “Miracle Materials” that are changing our lives: There are the advanced composites that lighten our airliners; the great plastics that increase the “cool factor” of today’s cars – while also making them safer and more economical. It’s one of earth’s more abundant resources; and the new discoveries, such as graphene, which promise to revolutionize biotechnology, computers and industry.
I’ve uncovered a company that’s found a way to use a most basic material in the most miraculous new ways. And that is creating a stunning profit opportunity for folks who act now.
America’s (New) War For Independence
Sand is one of the most abundant materials on earth.
It’s also one of the most useful.
Think about it: Sand is a key ingredient in glass, paint, concrete and bricks. And it’s a key ingredient in the “fracking” boom that’s promising to give America its energy independence.
But just because it’s plentiful and useful doesn’t mean it’s low-tech.
Just looking at fracking – or “hydro fracking,” as the experts refer to it. In its role as a drilling “proppant,” this granular substance is helping to fuel America’s new energy boom. At the very least, it serves as a catalyst for the growth industry of hydraulic fracturing that today is worth more than $40 billion.
So, because of fracking and the explosive growth in U.S. energy production, many fortunes are being made from sand.
And fracking isn’t the only sand-paved path to wealth.
The mid-cap leader I’m going to tell you about today is using several types of sand to deliver a pile of profits.
A New Age
There’s a reason I refer to this as a materials science “Golden Age.”
The breakthroughs we take for granted — from smartphones to Wi-Fi-enabled jet aircraft to 3D-printed human organs – wouldn’t be possible without the New Age materials scientists have created in recent years.
But I’m just as impressed with the science that lets us find new uses for mundane, or even forgotten, substances.
The United States has an abundant supply of “silica” sand, whose high quartz content gives it a “cutting edge” that’s ideal for, well, cutting-edge industrial uses. That supply is a key reason that North America dominates global fracking, accounting for 90% of world production.
The forecast firm MarketsandMarkets estimates the value of the fracking industry will hit $64 billion by the end of 2017. That’s an increase of more than 50% from the estimated $40 billion value in 2012, the last full year for which data is available.
Hydraulic fracking is a complicated process. But if you want to fully appreciate the profit opportunity we’re going to look at here in a minute, it’s worth understanding. So, let me simplify it for you.
The process involves injecting a combination of water, a proppant like sand, and chemicals into a well under very high pressure. This causes fissures in the rocks to release gas and oil, which then flow into horizontal wells for capture.
It all boils down to this: With fracking, drillers can access energy-bearing rocks such as shale that were formerly out of reach.
The federal government’s own statistics prove that the impact of fracking on U.S. energy production and independence has been massive. Citing the use of “new technologies,” a recent study by the Energy Information Administration (EIA) reveals that:
- The U.S. is on track to pump nearly 10 million barrels of oil a day by 2016 – putting it on par with Saudi Arabia.
- Oil production from shale reserves is forecast to nearly double from 2.3 million barrels a day in 2012 to 4.8 million barrels in 2021. That means shale-sourced oil will grow from 35% of the total today to 51% in just seven more years.
- Finally, natural gas production is expected to surge 56% between 2012 and 2040. Because of fracking, shale gas will soon account for about half of total U.S. gas production.
No wonder the company we’re going to look at today – U.S. Silica Holdings Inc. (NYSE: SLCA) – faces such a profitable future.
The Frederick, Maryland-based firm is a major supplier of silica sand proppants the fracking industry literally can’t do without.
What intrigues me so much about U.S. Silica is how the company’s business strategy keeps these sand-based products from becoming just a bunch of low-margin commodities.
As you folks know, when a product turns into a commodity it becomes awful tough to grow revenue and achieve consistent profits because there’s always a rival who’s willing to undercut you to hijack your market share.
But with 250 products going to 1,800 customers, U.S. Silica has committed itself to constant innovation, making that a key to success. In 2012 it created a new “technical director” post and constructed an advanced research lab.
More to the point, U.S. Silica has a supply chain and logistics operation second to none in the industry. This is critical because these operations serve as the additional barriers to entry that keeps the company’s rivals on the sidelines.
U.S. Silica’s products ride on five major railroads and the firm operates 3,600 of its own rail cars, a figure that will climb nearly 20% to 4,300 by the end of this year. U.S. Silica also can ship by truck and barge and maintains a number of facilities close to its clients’ drill sites.
Even if a competitor could somehow breach that logistics barrier, opening new mineral mines in the U.S. market is no easy feat. For silica mining, the permitting process alone could easily consume three years.
So, last year’s decision by U.S. Silica to pen three new mines before 2016 will greatly enhance the company’s competitive advantage. It also doubles its capacity for the oil-and-gas market from 3 million tons at the end of 2012 to 6 million by the end of this year.
As important as the fracking boom is to U.S. Silica’s future, this company is more than just a straight-up play on the energy boom.
A Specialist Among Specialists
U.S. Silica didn’t put its future in a single business basket. The company also has a specialty division that accounts for 40% of sales and that supplies a wide range of industries like housing, water-filtration and performance chemicals. Its materials are used to make glass for autos, smartphones and tablet computers.
Besides its wide array of products that include those for high technology, the unit has another big selling point: It’s the sole supplier to many of its other clients. That makes it difficult for those customers to jump ship, which gives U.S. Silica stockholders a nice built-in stability.
The reality is that you’d be hard-pressed to find another firm with more experience in this field. Founded in the late 1800s, the company used organic growth and mergers to become one of the largest firms in its industry.
Despite its long history, U.S. Silica only went public in early 2012. Since then, shares are up roughly 85% – more than double the 34.5% return of the U.S. Standard & Poor’s 500 Index during the same period.
But I still see plenty of upside for U.S. Silica’s shares.
The company has a market value of roughly $1.6 billion, and the stock trades at roughly $29.50 a share. At that price, the stock is clearly cheap: It trades at a forward Price/Earnings (P/E) ratio of just 14.2 – a discount to the 15.1 P/E of the S&P 500.
And the so-called “PEG Ratio” (Price/Earnings to Growth Rate) is just 0.89. Anything below the “fair price” ratio of 1.0 is considered a discount that lowers the risk of buying the stock.
Of course, these prices and ratios are all relative – to the company’s growth prospects.
Over the last three years, U.S. Silica has grown it’s earnings per share (EPS) by a rate of more than 100%. If we cut that rate to a conservative 30%, then earnings per share could still double in less than three years – meaning the company’s share price could do the same.
But there’s even more good news. Just last week, U.S. Silica issue preliminary fourth-quarter guidance that missed expectations. The company said severe weather in December limited drilling, which impacted sales.
The news sent shares down nearly 13% in two days. But that’s what investment pros like to refer to as a “one-time” event – meaning it’s not indicative of a slump in demand. In fact, I believe investors greatly overreacted at a time when the markets were in full-blown sell-off mode because of worries that slower growth in emerging markets could impact overall global corporate profits.
The bottom line: This “one-timer” means we can take advantage of the market’s temporary mismatch and pick up shares of this intriguing Miracle Materials play at a nice discount to its true worth.
And with the U.S. economy surging – and the North American fracking boom in a flat-out acceleration mode – we’re actually being handed the chance to buy a stock with double-your-money -potential at the market’s discount window.
Here at the Strategic Tech Investor, that’s a bargain we’ll make any day of the week.
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