U.S. Silica Downgrade: 'It's Hard To Think Of A Better Short'

Shares of U.S. Silica Holdings Inc SLCA have surged nearly 200 percent year-to-date and are trading at a substantial premium to other more traditional sub-sector stocks. “We believe the trade has more than run its course,” D.A. Davidson’s Sonny Randhawa said in a report. He downgraded the rating on the company from Neutral to Underperform while maintaining a price target of $42.

Short SLCA

The company currently has 15 Buy ratings and 3 Neutral ratings, with the bullishness being driven by expectations of “sand demand moving up the frac sand cost curve as demand increases,” Randhawa mentioned.

Randhawa added, however, that it was “hard to think of a better short” than US Silica, since the stock would likely continue to underperform the group due to “drag from its ISP segment, acquisition/integration risk, its premium valuation and management’s misguided belief that you can consolidate a fragmented industry selling a commodity product without barriers or lead-time to entry.”

Failure To Meet Return Expectations

Crude prices have collapsed, and the frac sand industry is still in its nascent stage. Against this backdrop, “it’s safe to assume any frac sand mine or logistics transaction pre-downturn have failed to meet return expectations,” the analyst commented.

U.S. Silica had originally cited superior margins at the NBR mine to justify spending $210 million on the acquisition. Randhawa pointed out that there has been a significant delay in ramping production.