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Concrete & Aggregates Industry Appears to be in Good Shape

Shrabana Mukherjee

The Zacks Building Products - Concrete & Aggregates industry consists of manufacturers, distributors and sellers of construction materials like aggregates, concrete, and other such items. 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 robust construction spending on government projects. The industry is also likely to benefit from growth in public sector construction activity – mainly in large transportation projects and contract work for highways – as well as strong pricing. Public outlays of total U.S. construction spending totaled $214.3 billion in the first eight months of 2019, reflecting an increase of 5.7% year over year. Notable gains in commercial, amusement and recreation, and conservation and development have also been the bright spots. Meanwhile, the housing market, which has borne the brunt of rising interests/mortgage rates and higher raw material costs since the end of 2017, has regained its momentum, buoyed by declining mortgage rates trend. The industry players are expected to reap the benefits of solid household formation attributable to declining mortgage/interest rates, steady economic growth and favorable demographics. The housing market rebound and Trump’s impetus to enhance the country’s infrastructure by upgrading highways, railroads, bridges and broadband are expected to be key catalysts for the industry.
     
  • The industry participants follow a well chalked-out acquisition plan 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 increasing material and transportation expenses. The companies use electricity, diesel fuel, liquid asphalt and other petroleum-based resources. Hence, supply-related woes and significant fluctuation in prices of these resources affect operating results. The businesses are also exposed to weather-related risks that affect production schedules and hence profitability. Excessive rainfall, flooding or severe drought jeopardize shipments and production. The first and fourth quarters are mostly affected by winter. Again, hurricanes in the Atlantic Ocean and Gulf Coast are the most active during the third and fourth quarters. These impediments may continue to bump up costs and mar profits of the industry participants.

Zacks Industry Rank Indicates Bullish Prospects

The Zacks Building Products - Concrete & Aggregates industry is a 12-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #37, which places it in the top 15% 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 bright 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.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms Sector & S&P 500

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

The stocks in this industry have collectively gained 7.3% versus the broader sector’s growth of 5.7%. Meanwhile, the S&P 500 has lost 0.9%.

One-Year Price Performance


 
 
Industry’s Current Valuation

On the basis of forward 12-month price-to-earnings, which is a commonly used multiple for valuing Building Products - Concrete & Aggregates stocks, the industry is currently trading at 20.5X versus the S&P 500’s 16.3X and the sector’s 14.3X.

Over the past five years, the industry has traded as high as 39.4X, as low as 12.9X and at the median of 20.5X, as the chart below shows.

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

 

Bottom Line

Indeed, weather-related woes, higher labor, freight and material costs are eating into margins of industry players. Nonetheless, a significant boost in infrastructural and construction spending should continue to favor the industry.

Below we present two stocks from the Zacks Building Products - Concrete & Aggregates space that carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Martin Marietta Materials, Inc. (MLM): This Raleigh, NC-based building materials supplier has an expected earnings growth rate of 16% for 2019. The stock carries a Zacks Rank #2 and its current-year earnings estimates have moved 1% up in the past 60 days.

Price and Consensus: MLM



Summit Materials, Inc. (SUM): This Denver, CO-based company has an expected earnings growth rate of 320% for 2019 and carries a Zacks Rank #2. Its EPS estimates for the current year have witnessed upward revision of 1.6% to 63 cents in the past 60 days.

Price and Consensus: SUM



Investors might prefer holding on to the following stocks with impressive prospects.

Vulcan Materials Company (VMC): This Birmingham, AL-based company produces and supplies construction aggregates, asphalt mix as well as ready-mixed concrete. The stock carries a Zacks Rank #3 (Hold) and its current-year earnings estimates have moved 0.4% upward in the past 60 days. The company has an expected earnings growth rate of 19.5% for 2019.

Price and Consensus: VMC



Eagle Materials Inc. (EXP): Headquartered in Dallas, TX, this company produces and supplies heavy construction materials, light building materials, and materials for oil and natural gas extraction in the United States. The stock carries a Zacks Rank #3 and has a three-five year expected earnings growth rate of 10%.

Price and Consensus: EXP



Below is one stock that we recommend investors to stay away from for the time being.

U.S. Concrete, Inc. (USCR): Based in Euless, TX, this company produces and sells ready-mixed concrete, aggregates, and concrete-related products and services. The stock carries a Zacks Rank #5 (Strong Sell) and its current-year earnings estimates have witnessed downward revision of 22.3% in the past 60 days.

Price and Consensus: USCR




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Vulcan Materials Company (VMC) : Free Stock Analysis Report
 
U S Concrete, Inc. (USCR) : Free Stock Analysis Report
 
Summit Materials, Inc. (SUM) : Free Stock Analysis Report
 
Martin Marietta Materials, Inc. (MLM) : Free Stock Analysis Report
 
Eagle Materials Inc (EXP) : Free Stock Analysis Report
 
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