Vulcan Materials Company VMC is riding on higher aggregate shipments, strong pricing, cost-saving initiatives and strategic acquisitions.
However, rising diesel and liquid asphalt costs, along with seasonal influences on construction activity are likely to weigh on the company’s performance.
Meanwhile, shares of Vulcan have outperformed its industry and the S&P 500 composite in the past three months. Its shares have gained 23.6% compared with the industry’s 17.1% growth and the S&P 500’s 17.7% rally in the same time frame.
Let’s delve deeper into the factors substantiating its Zacks Rank #3 (Hold).
Catalysts Driving Growth
Based in New Jersey, Vulcan is one of the nation's largest producers of construction aggregates. The company’s Aggregates business (including crushed stone, sand and gravel, and sand and other aggregates), contributing 80.2% to total revenues in 2018, is one of the major growth drivers for the company.
Over the past few quarters, the company has been experiencing strong aggregate shipments and pricing, backed by growing public demand and operational discipline. In 2018, its aggregate sales increased 13% from a year ago to $3,513.6 million. Shipments (volumes) were up 10% year over year (6% on a same-store basis) and mix-adjusted price increased 3.5%, led by double-digit growth in Alabama, Arizona, Florida, Illinois, Tennessee and Texas. Notably, total revenues grew 13% on a year-over-year basis to $4,382.9 million in 2018.
Vulcan projects aggregate shipments to rise 3-5% year over year in 2019. Also, aggregates freight-adjusted price is expected to increase 5-7% from a year ago.
Meanwhile, increased construction spending in the United States in recent times is a pure bliss for Vulcan. Precisely, public sector construction spending (representing 45-55% of total aggregate shipments) is quite stable compared with the private sector, as it is less affected by general economic cycles. The company is witnessing strong public-sector demand, courtesy of Trump’s impetus to fix America’s infrastructure over the next 10 years.
Again, the company focuses on reducing controllable costs and maximizing operating efficiency across the organization in order to generate higher earnings and cash flow. Strong local operating disciplines, production efficiency and a commitment to improve on a regular basis have led to considerable cost savings for Vulcan. Notably, in 2018, its selling, administrative and general expenses, as a percentage of total revenues, improved 75 basis points. Adjusted EBITDA increased 15.3% from a year ago in the same period.
Notably, the company anticipates double-digit earnings growth in 2019, backed by continued strength in public and private construction demand. Per the consensus estimate, adjusted earnings is currently pegged at $4.78 per share for 2019, reflecting 18% year-over-year growth.
Vulcan followed a systematic inorganic strategy for expansion and has wrapped up various bolt-on acquisitions that significantly contributed to growth. In 2018, the company closed four acquisitions for a total consideration of $219.9 million.
Factors Affecting Vulcan’s Profitability
Vulcan is experiencing higher diesel and liquid asphalt costs over the last few quarters. Diesel expenses increased 25% and liquid asphalt costs grew 32% year over year in 2018. Asphalt gross profit declined 38.5% year over year, as higher liquid asphalt costs negatively affected segmental earnings by $54 million. The company uses large amounts of electricity, diesel fuel, liquid asphalt and other petroleum-based resources, subject to potential supply constraints and significant price fluctuation. Variability in the supply and prices of these resources could weigh on its operating costs and profitability going forward.
Moreover, the company is prone to bad weather conditions, as most of its products are used outdoors in the public or private construction industry. Also, the company’s production and distribution facilities are located outdoors. Inclement weather affects its ability to produce and distribute products, in turn impacting demand.
Stocks to Consider
Some better-ranked stocks in the Zacks Construction sector include Arcosa, Inc. ACA, Armstrong World Industries, Inc. AWI and Fastenal Company FAST, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Arcosa and Armstrong World’s earnings for the next year are expected to increase 28.7% and 12.6%, respectively.
Fastenal is expected to record 8% earnings growth in the current year.
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