We recently upgraded our rating on Vulcan Material Company (VMC) from Neutral to Outperform as it stands to benefit largely from a recovering housing market.
With a gradual recovery in the overall economy, the homebuilding industry is finally seeing signs of stabilization in 2012. The downturn during 2006-2007 had hurt the homebuilding sector hard. We believe that the housing market is starting to benefit from an increase in employment rates and higher consumer confidence. Houses are more affordable now as mortgage loans come with relatively low interest rates while renting becomes more expensive. As the new home construction market recovers, the demand for the company’s products has also gone up.
Further, we are encouraged by the company’s better-than-forecast first half results, in particular the impressive performance at the Aggregates segment which is slowly gaining momentum.Vulcan is the largest producer of construction aggregates in the US. The Aggregates business, which accounts for the lion’s share of the company’s revenue, is slowly gaining momentum with signs of recovery in the in the U.S. construction sector. The segment is witnessing consistent volume growth driven by improving demand. The segment’s net sales increased $73 million and gross profit was up $53 million in the trailing six months ended March 31, 2012 versus the prior-year period. Management also projects a much improved earnings in this segment in 2012.
We also like the company’s strong market standing, steady volume growth and expanded cost initiatives. Demand for public construction projects, which account for more than half of the company’s revenues, remains strong. Moreover, the private sector is slowly recovering which until now was considered fragile.
It is worthwhile to note that rival Martin Marietta Materials Inc.’s (MLM) attempt to take over Vulcan has almost fallen apart with a court’s recent ruling restricting Martin Marietta by at least four months to take over Vulcan. The order removes a significant overhang for Vulcan, at least for some time to come. In a hostile move, in December 2011, Martin Marietta proposed to purchase all outstanding shares of Vulcan at a fixed exchange ratio of 0.50 shares of Martin Marietta common stock for each Vulcan common share. Vulcan management however found the offer grossly inadequate.
Had Martin Marietta succeeded in its attempts, its four directors would have contested in the election at the upcoming Vulcan annual meeting in June this year. However, with the stay denied, Martin Marietta’s attempt to nominate its directors to Vulcan’s board will most probably be delayed until the next annual meeting.
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