We recently downgraded our recommendation on Vulcan Materials Company (VMC) from Outperform to Neutral following the lackluster growth in the second quarter of 2012.
Vulcan posted a net loss of 2 cents per share in the second quarter of 2012, largely missing the Zacks Consensus Estimate for a gain of 6 cents per share. Decline in revenue and volumes took a toll on the earnings. Total revenue in the quarter declined 1.1% to $694.1 million mainly due to volume declines in the Aggregates segment.
Revenues in the aggregates segment declined 1.5% due to an unfavorable geographic mix of shipments. Despite the revenue miss, the consolidated gross margins improved 220 basis points in the quarter on the back of lower unit cost of sales due to improved productivity. Adjusted EBITDA was $127.3 million, up 8% from the prior-year quarter, driven by improved gross margins and lower costs.
Though shipment growth was uneven in the first half, management expects a much more normal geographic mix in the second half. In 2012, management continues to expect adjusted EBITDA of $500 million. With $175 million of adjusted EBITDA realized in the first half, management expects to post the remaining $325 million in the second half, a significant improvement from the previous half. The improvement is expected to come from cost saving actions and better earnings in the Aggregates, Concrete and Asphalt segments.
Vulcan is the largest producer of construction aggregates in the US. Aggregates like crushed stone, sand and gravel are used in all types of construction, whether public or private projects. 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 U.S. construction sector. Though the second quarter results were below expectations, management projects much improved earnings in this segment in second half of 2012.
Vulcan serves both the private and public sectors. Public construction projects, such as bridges, dams and roads, are responsible for more than half of Vulcan's businesses. Generally, public sector spending is much more stable than the private sector because the public construction projects are less affected by general economic cycles. In addition, the company is also witnessing improving private construction activity in both the residential and non-residential categories, which was until now sluggish. The improvement in private construction industry bodes well for continued demand recovery in Vulcan’s markets.
Overall, Vulcan has solid long-term fundamentals and has provided a bright outlook for the second half of 2012. However, we downgraded our rating on the stock to Neutral as we prefer to wait and see if the company actually delivers on the bullish second half outlook.
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