On Jan 25, 2014, we upgraded our recommendation on Vulcan Materials Company (VMC) to a Zacks Rank #1 (Strong Buy) after it announced the sale of its non-core cement and concrete businesses in Florida.
Why the Upgrade?
Vulcan Materials will sell these assets located in Florida and South Georgia to Cementos Argos, one of the largest cement and concrete manufacturers and suppliers in the United States, for $720 million in cash. Under the deal, Vulcan Materials, the largest producer of construction aggregates in the U.S., would retain all of its aggregates operations in Florida and continue to supply aggregates to the divested facilities at market prices for the next 20 years. The transaction is expected to close in the first quarter of 2014.
Concurrent with the divesture, Vulcan Materials also announced that it will initiate a tender offer to purchase $500 million in outstanding debt.
The divestures of these non-core assets will strengthen Vulcan Materials’ financial position and help it to focus its resources on flagship aggregates segments. Post the divestiture, the company will generate a pre-tax gain of $210 million. The reduction in debt will lower the company’s interest expense, thereby boosting profits.
The divesture is the latest step in Vulcan Materials’ planned asset sale initiative announced in Feb 2012. Under the sale, the company has been divesting its non-core assets in order to focus on the higher-growth Aggregates business. As part of this initiative, the company has already sold off assets in California and certain markets in Midwest and a small quarry in rural Virginia. Moreover, Vulcan Materials divested portions of the future produce of four aggregate quarries in South Carolina and four quarries in Atlanta to Plum Creek Timber Co. Inc. (PCL).
Including the latest divesture, Vulcan Materials has now raised more than $1 billion in total proceeds and lowered debt by almost $800 million. Apart from improving the core aggregates asset portfolio, the proceeds from these transactions is strengthening Vulcan Materials’ balance sheet as well.
In fact, Vulcan Materials has seen strong momentum after it announced impressive third-quarter 2013 results on Nov 4. Both earnings and revenues beat the Zacks Consensus Estimate and also grew year over year owing to pricing gains and volume growth in most of the segments. Growth was driven by improved product demand owing to broad based recovery in private construction activity, especially residential.
Additionally, most of the volume and pricing increase was noted in the aggregates segment which was sluggish in the past few quarters. Management is seeing improving trends in aggregates’ requirement as private construction demand is growing with the recovery in the housing industry. The demand for highway construction is also expected to grow gradually with increased funding certainty from the new highway bill and an expanded Transportation Infrastructure Finance and Innovation Act program.
Other Stocks to Consider
Other favorable-ranked stocks in the building materials/home improvement sector include Anhui Conch Cement Co. Ltd. (AHCHY) and United Rentals, Inc. (URI). While Anhui Conch sports a Zacks Rank #1, United Rentals carries a Zacks Rank #2 (Buy).