I wrote an article on U.S. Silica Holdings (SLCA, Financial) back in November 2021, when the stock was down and out. Since then, the company has posted stellar results, with its stock price gaining by 122% as well.
Many may be wondering whether U.S. Silica stock's recent surge can continue. Should investors cash out now? Should those eyeing the stock stay away? Personally, I believe the stock has plenty of steam left; here's why.
Momentum
The stock's recent performance was due to its interlinkage with the energy sector, as it provides silica products for integrated producers. Demand has risen mainly due to the energy sector's annual CapEx, which reached $1.5 trillion in 2021.
Source: S&P Global
The systemic support was reflected in U.S. Silica's fourth-quarter report, as the company announced a 25% increase in year-over-year revenue, driven by a 48% increase in volume sold. Furthermore, the company capitalized on oil and gas proponent sales during the latter part of the year, mainly to customers operating in the Permian Basin's Texas region.
Standing up well to inflation
U.S. Silica hasn't only benefited from the surge in the price of oil and gas but also from the price rises of its own products' costs. The company has the benefit of owning an integrated business model, in which it controls the prices of its own sand supply, which is used for its manufactured products. I believe this is very useful considering the current inflationary environment.
In addition to internal matters, the stock market seems to favor up to midstream companies. Stock market participants tend to edge towards companies that can pass down inflation rather than others that may have to restrict their margins to sustain their sales.
Key metrics
This stock is still undervalued on a sector-relative basis. I felt it prudent to compare it relative to its sector peers rather than its own five-year average, as it is currently in a cyclical upturn.
U.S. Silica is trading at price-sales and enterprise-value-to-sales discounts of 37.36% and 23.08%, respectively, compared to the averages of the rest of its sector, suggesting that the market is yet to price in the stock's full top-line potential.
Additionally, the stock has gathered a significant amount of steam lately by trading above its 10-, 50-, 100- and 200-day moving averages, meaning that a momentum pattern has formed.
The bottom line
U.S. Silica has doubled in value since I last looked at it, and based on my analysis of the company's growth drivers and the stock's momentum, we won't likely experience a slowdown any time soon. Moreover, I believe the stock is undervalued when we consider the valuations of sector peers.
