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Martin Marietta (MLM) Gains From Higher Shipments & Pricing

Zacks Equity Research

Martin Marietta Materials, Inc. MLM has been benefiting from higher shipments, acquisitions, strong pricing and cost-management efforts.

Shares of this leading supplier of construction aggregates in the United States have outperformed its industry in the year-to-date period. The stock, which shares space with Vulcan Materials Company VMC, Eagle Materials Inc. EXP and Summit Materials, Inc. SUM in the Zacks Building Products - Concrete and Aggregates industry, has gained 34.2% compared with its industry’s 24.8% growth in the said period. The price performance is backed by the company’s earnings surprise history, having surpassed the Zacks Consensus Estimate in three of the last four quarters, with the average positive surprise being 38.7%.

Earnings estimates for 2019 have increased 3.1% over the past 60 days, reflecting analysts’ optimism surrounding its bottom-line growth prospects.

 

Let’s delve deeper into the factors that substantiate its Zacks Rank #2 (Buy). You can also see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Key Growth Drivers

Martin Marietta has been benefiting from higher aggregate shipments. Precisely, aggregate shipments to the non-residential market (representing 37% of first-quarter 2019 aggregate shipments) increased 33% from the year-ago level, driven by both commercial and heavy industrial construction activity. The Architectural Billings Index and Dodge Momentum Index suggest commercial and institutional construction activity to remain healthy throughout 2019. The company expects large energy-sector projects, particularly along the Gulf Coast, to continue driving growth and boosting aggregates demand over the next several years.

Residential construction, which accounted for 23% of first-quarter heritage aggregate shipments, should continue to grow within its geographic footprint, particularly now, as mortgage rates have been stabilizing. Despite the recent slowdown in housing unit starts at the national level, the residential outlook across Martin Marietta’s geographic footprint remains positive, backed by favorable demographics, job growth, land availability, steady interest rates and deficient permitting.

Given robust construction activity scenario, the company’s shipment volume and pricing have been improving across the majority of the building materials business. In the first quarter of 2019, Martin Marietta’s heritage aggregates’ pricing and shipments improved 4% and 12.5%, respectively, from the prior-year period. Moreover, pricing and shipments, including acquisitions and divestitures, increased 2.3% and 24.2%, respectively, on a year-over-year basis. Also, consolidated gross margin improved 140 basis points (bps) to 15.2%. Its earnings from operations and adjusted EBITDA jumped 77.1% and 28.2%, respectively, from the year-ago level.

To bolster the company’s strong presence across the world, it keeps on investing in new businesses to expand geographic footprint and market share. The company completed more than 90 smaller acquisitions since its Initial Public Offering in 1994 till 2018, which allowed it to enhance and expand aggregates-led presence in the building materials marketplace. The most recent and notable one is the Bluegrass acquisition in April 2018. The addition of Bluegrass strengthened Martin Marietta’s aggregates position in high-growth regions of Southeastern and Mid-Atlantic.

Overall, the company’s string of acquisitions, and an uptick in private and public construction activity will drive Martin Marietta’s growth. The company has solid growth prospects, as is evident from the Zacks Consensus Estimate for 2019 earnings of $9.26 per share, which indicates 14.5% year-over-year improvement on 8.4% revenue growth. Moreover, its earnings are expected to increase 14.9% on 7.1% top-line growth in 2020.

That said, weather-related challenges in many markets are affecting Martin Marietta. All of the company’s businesses are subjected to weather-related risks that can significantly affect production schedules and profitability. Within downstream businesses, ready mix concrete shipments decreased 4% year over year in the first quarter of 2019 as Colorado’s harsh winter hindered early construction activity. The Colorado asphalt and paving business lost production days due to extreme winter weather that includes freezing ground temperatures, resulting in reduced asphalt shipments.

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