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Why U.S. Silica (SLCA) Slipped on Tuesday

NEW YORK (TheStreet) -- U.S. Silica (SLCA - Get Report) slipped on Tuesday after investment firm Jefferies downgraded the stock to "hold" from "buy" with a price target $10 lower to $31.

"It disappoints us to conclude that frac sand demand potential cannot offset execution concerns," wrote the analysts in the report.

As such, 2014 EPS was lowered to $1.85 from $2.35, and 2015 EPS was cut to $2.30 from $3.

"We sense management's optimism has faded regarding improving its distributed cost position into the Permian before the start-up of its LaSalle, IL plant in 2Q14," the analysts wrote. "The company faces rail-related issues diverting product from ND (Bakken) to TX (Permian) where larger customers continue to exceed their contractual allotments."

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"We believe the strategies of working with larger service providers and expanding distribution capability may be less helpful/differentiating than originally anticipated. We had thought the relationships might yield pricing adjustments for shipment to different basins (to allow for varying distribution cost), but instead we sense that SLCA is no less vulnerable to prevailing 'basin pricing'," they continued.

On Friday, the specialty mineral producer announced weaker-than-expected preliminary results for the fourth quarter ended December. Management said it anticipates quarterly net earnings of 31 cents a share on revenue of $149.5 million. Analysts surveyed by Thomson Reuters had anticipated earnings of 39 cents a share on $151.2 million in revenue.

"Our fourth-quarter results were negatively impacted by the severe winter storms in mid- and late December," said CEO Bryan Shinn in a statement. "The weather reduced well completion activity and drove higher costs across our supply chain. We also encountered meaningful one-time costs, including a bad debt expense related to a customer bankruptcy."

The company expects full-year 2014 adjusted EBITDA in the range of $180 million to $200 million, below consensus of $212.8 million.

Fourth-quarter results are due for release Feb. 25.

TheStreet Ratings team rates U.S. SILICA HOLDINGS INC as a Buy with a ratings score of B-. The team has this to say about their recommendation:

"We rate U.S. SILICA HOLDINGS INC (SLCA) a BUY. This is driven by some important positives, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its robust revenue growth, solid stock price performance, growth in earnings per share, increase in net income and expanding profit margins. We feel these strengths outweigh the fact that the company has had generally high debt management risk by most measures that we evaluated."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 2.3%. Since the same quarter one year prior, revenues rose by 24.6%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • Investors have apparently begun to recognize positive factors similar to those we have mentioned in this report, including earnings growth. This has helped drive up the company's shares by a sharp 47.58% over the past year, a rise that has exceeded that of the S&P 500 Index. Regarding the stock's future course, although almost any stock can fall in a broad market decline, SLCA should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • U S SILICA HOLDINGS INC has improved earnings per share by 11.1% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, U S SILICA HOLDINGS INC increased its bottom line by earning $1.50 versus $0.58 in the prior year. This year, the market expects an improvement in earnings ($1.57 versus $1.50).
  • The net income growth from the same quarter one year ago has exceeded that of the Metals & Mining industry average, but is less than that of the S&P 500. The net income increased by 13.5% when compared to the same quarter one year prior, going from $18.80 million to $21.33 million.
  • 36.98% is the gross profit margin for U S SILICA HOLDINGS INC which we consider to be strong. Regardless of SLCA's high profit margin, it has managed to decrease from the same period last year. Despite the mixed results of the gross profit margin, the net profit margin of 14.77% trails the industry average.

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