Shares in Armchair Trader venture pick Smith-Midland NASDAQ:SMID are up 45% in November – up from $33 at the start of the month to close at $49 on Black Friday. The NASDAQ-listed stock joined The Armchair Trader’s venture portfolio on 6 February.
A specialist in pre-cast concrete structures, we saw Smith-Midland as a likely beneficiary of future US infrastructure initiatives, for example the provision of pre-cast barriers, which are forming an increasingly lucrative part of its product portfolio in 2024.
In our original assessment of the stock, we noted a negative report from Quipus Capital, which said Smith-Midland’s recent revenue trends (Q4 2023) indicated inflationary accommodation of prices rather than a secular change in the business. We also mentioned that the last time Quipus Capital said Smith-Midland was over-valued, the stock doubled in value.
Shares in Smith-Midland are up over 24% on a YTD basis, taking into account a slump in the price over the summer months. As a high risk, venue trade, we had no trailing stop loss in place for the company. The $49 stock price means The Armchair Trader is currently in the money on the investment.
We argued in our original assessment of the company that the Inflation Reduction Act in the US could be a possible game changer for Smith-Midland, as it would make US infrastructure more attractive to investors and US businesses. The Act is focusing on the construction sector, especially green buildings and the improvement of existing building codes. We also thought that Smith-Midland’s pre-cast concrete fixtures would be in demand as the US begins to modernise its highways.
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What is driving the Smith-Midland share price?
Smith-Midland last set of numbers, released in mid-November, looked excellent. Revenue increased 51% to $23.6m and service revenue was up 170%. The company managed to double its operating income compared with the same quarter last year.
“Our third quarter was a record-setter for both revenue and net income, driven by the tailwinds within our sector and multiple special barrier projects, occurring and completed in the quarter, which have a more favorable margin profile,” according to Ashley Smith, Chairman and Chief Executive Officer of Smith-Midland. “Our record backlog of $62.8 million reflects the continued strong demand for our products as state and local governments use their allocated funds from the Infrastructure Investment and Jobs Act and for our utility vaults to meet the increasing growth of data centers.”
Smith-Midland’s gross profit increased to $6.6 million compared to $3.6 million in the prior-year quarter due to the higher revenue base and more favourable product mix. Gross margin for the quarter was 27.9% compared to 22.9% in the third quarter of 2023. The increase is due primarily to multiple special barrier projects and a better-fixed cost absorption in the current quarter, the company told investors last month.
Increased sales volume
Management also anticipates increased sales volume for the full year of 2024 compared to 2023. Infrastructure initiatives across the United States continue to drive greater bidding activity and a subsequent increase in orders for its portfolio of patented, proprietary, and custom products.
Inflationary pressures still remain, particularly across labour and materials costs, and Smith-Midland says it is continuing to manage these input costs while attracting and retaining skilled labour.
The company’s backlog was approximately $62.8 million recorded as of November 1, 2024 compared to $60.2 million in backlog one year prior. The majority of the backlog is anticipated to be fulfilled within 12 months; however, some projects will have a multi-year timeline.
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