US Silica Is the Most Undervalued Stock I've Seen

Significant upside potential as oil and gas production picks up

Summary
  • Oil and gas production is ramping up.
  • A significant spin-off could unlock value.
  • Valuation multiples indicate the stock is trading at a significant discount.
Article's Main Image

U.S. Silica Holdings Inc. (SLCA, Financial) produces and markets silica products and industrial special products. The company's stock has struggled in recent times due to lower than normal demand from oil and gas plants that suffered from pandemic-induced drops in energy usage. I see upside around the corner for this pick-and-shovel play as oil and gas demand and production begin to soar once again.

Earnings Review

In its third quarter, the company missed on its revenue estimate by $4.45 million and its EPS estimate by $0.03.

The driving force behind this was slowing supply chains in the energy sector and chips market. Furthermore, the exhaustion of budgets from key buyers was also an issue. Inflation ramped up the price of silica by more than twofold during 2021 (it had risen by three times at one point), which deflated the value of key buyers' budgets.

However, I anticipate the pendulum to swing in the other direction now. Since November, silica prices have already retraced by around 22%, and U.S. inflation is anticipated to level off to 2.3% in 2022, causing lower input costs for Silica buyers and for U.S. Silica itself.

Exercising real options

U.S. Silica has a real option that it plans on exercising to spin off its industrial special products business unit. It considers its presence in both the sectors it serves large enough to benefit from separate entities. Spin-offs usually bring significant branding benefits, and I believe this is what U.S. Silica aims to do.

According to the company's CEO, Bryan Shinn, "Both our ISP and [oil and gas] segments are industry leaders, and it is from this position of strength that we believe a separation or sale of ISP has the potential to unlock significant value and maximize returns for all of our stakeholders."

Valuation

Even after a tough quarter, the stock still looks undervalued. The stock's change in price-sales ratio over time indicates that sales are currently growing 40% faster than the company's stock price.

1461471753963532288.png

The price-sales ratio of 0.71 is significantly below its all-time high of 6.99. Based on previous data, if the stock's price-sales ratio were to revert to its record high, the stock could gain by an astronomical 884%.

Furthermore, the stock's price-book ratio is trading below its five-year average by 9.97%, and its price-to-cash-flow ratio is trading at a 99.36% discount, signaling significant upside potential.

Final word

U.S. Silica has faced tough times during this pandemic, and its recovery has been slower than oil and gas producers due to supply chain issues, but I believe the stock's set for a turn towards the upside. It's one of the most undervalued stocks I've seen on the market.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure