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Bleak Near-Term Prospects for Concrete & Aggregates Industry

Zacks Equity Research

The Zacks Building Products - Concrete & Aggregates industry consists of manufacturer, distributer and seller of construction materials like aggregates, concrete, and other construction materials. The materials also include gypsum wallboard, recycled paperboard, concrete blocks, ready-mix concrete and oil and gas proppants.

Let’s take a look at the industry’s three major themes:

  • The industry is poised to benefit from increased construction activity backed by robust construction spending. Construction spending in the United States has ramped up lately, supported by a steady increase in outlays on private as well as public construction projects. Total U.S. construction spending advanced 5.1% in the first 10 months of 2018. Precisely, the industry is poised to benefit from the growth in public sector construction activity as well as strong pricing. Large transportation projects and growth in contract work for highways have steadily increased demand. Trump’s $1.5-trillion infrastructure plan appears to be the key catalyst to the industry’s growth.
     
  • The industry participants strongly follow a systematic acquisition strategy to enhance domestic and international portfolios. Meanwhile, companies are increasingly focusing on the pricing of products to offset higher input and freight expenses. The focus is also on reducing controllable costs and maximizing operating efficiency across business lines to generate higher earnings and cash flow.
     
  • However, the industry players are plagued with shortage of skilled laborers, rising wage costs and flaring-up material and transportation expenses. The companies use electricity, diesel fuel, liquid asphalt and other petroleum-based resources. Hence, any supply-related woes and significant price fluctuation of these resources affect operating results and profitability. Meanwhile, the companies’ businesses are subjected to weather-related risks that significantly affect production schedules and profitability. Excessive rainfall, flooding or severe drought jeopardize shipments, production and profitability in the markets served by the companies. The first and fourth quarters are most adversely affected by winter. Again, hurricane in the Atlantic Ocean and Gulf Coast is most active during the third and fourth quarters. These impediments may continue to aggravate costs and mar profits of the industry participants in the near future.

Zacks Industry Rank Indicates Dull Prospects

The Zacks Building Products - Concrete & Aggregates industry is an eight-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #236, which places it at the bottom 9% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates gloomy near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. Since June 2018, the industry’s earnings estimate for 2018 and 2019 has gone down approximately 17.4% and 16%, respectively.

Despite the bleak near-term industry prospects, we present a few stocks that you can keep an eye on or continue to hold if they are already in your portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.

Industry Lags Sector & S&P 500

The Zacks Building Products - Concrete & Aggregates industry has lagged the broader Zacks Construction Sector as well as the Zacks S&P 500 composite over the past year.

The industry has declined 31.6% over this period compared with the S&P 500’s decline of 6.7% and the broader sector’s decrease of 27%.

One-Year Price Performance

 

Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing heavy construction stocks, the industry is currently trading at 14.2X versus the S&P 500’s 15.7X and the sector’s 11.4X.

Over the past five years, the industry has traded as high as 64.7X, as low as 13.4X and at the median of 23.1X, as the chart below shows.

Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500


Bottomline

A significant boost in infrastructural and construction spending should continue to favor the industry. However, weather-related woes, higher labor, freight and material costs are compressing margins.

Currently, none of the stocks in the Zacks Building Products - Concrete & Aggregates industry carries a Zacks Rank #1 (Strong Buy) or #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Investors may hold on to the following stocks, as they currently carry a Zacks Rank #3 (Hold) and have solid earnings growth prospects.

Summit Materials, Inc. (SUM): Shares of this Denver, CO-based company has an expected earnings growth rate of 116.4% for 2019.

Price and Consensus: SUM


CementosPacasmayo S.A.A. (CPAC): Headquartered in Lima, Peru, this cement company has an expected earnings growth rate of 19.6% for 2019. Its long-term earnings growth rate is expected to be 28.8%.

Price and Consensus: CPAC


Forterra, Inc. (FRTA): Headquartered in Irving, TX, this company manufactures and sells water and drainage pipe and products in the United States and Eastern Canada. The company’s bottom line is expected to witness 95.1% growth in 2019.

Price and Consensus: FRTA


Vulcan Materials Company (VMC): This Birmingham, AL-based produces and supplier of construction aggregates, asphalt mix as well as ready-mixed concrete. The company has an expected earnings growth rate of 22.9% for 2019.

Price and Consensus: VMC


Martin Marietta Materials, Inc. (MLM): This Raleigh, NC-based building materials supplier has an expected earnings growth rate of 17.1% for 2019.

Price and Consensus: MLM


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