After some crushing news earlier this year, the ground seems
to be shifting a little in favor of sand-and-gravel companyMartin
Marietta Materials (
The biggest positives: a more favorable outlook for big
infrastructure projects, such as highway construction and an
upturn in residential construction.
"(Martin) is primarily a play on infrastructure," said John
Kasprzak, analyst with BB&T Capital Markets. "Fifty to 55% of
their volume is infrastructure related, highways, bridges and the
New highway awards in October "were up strongly," he said. "If
the strong performance in October continues into next year I
would certainly think Martin Marietta would benefit."
The awards come in the wake of a long-stalled federal highway
bill, which finally passed in late June, was signed by the
president in July and went into effect Oct. 1.
Since the last highway bill expired in September 2009, a
series of short-term funding resolutions were used in the
interim. The new bill is in effect for two years, providing about
$100 billion in funds.
"The last time our industry had two years of forward
visibility was in 2007," said Ward Nye, Martin Marietta's CEO, in
an interview. "Most of the work (since late 2009) was for
short-term repairs. Under the new bill, we think we'll see more
new lanes built, more new roads built."
A particularly welcome part of the highway bill is an enhanced
federal transportation loan assistance program to states, under
the Transportation Infrastructure Finance and Innovation Act, or
Nye says TIFIA has the potential to provide states around $30
billion in incremental dollars for new highway construction.
The new highway programs "give much greater clarity for large
infrastructure projects for multiyear periods," said Kathryn
Thomas, partner at Thompson Research Group.
Separately, new heavy-industrial projects could also spur
demand for aggregates, she says.
All this is welcome news for Martin Marietta after its failed
$4.5 billion hostile bid for chief rivalVulcan Materials (
), the No. 1 player in an aggregates industry that has long been
In late May, a Delaware Supreme Court ruling upheld a lower
court's decision that Martin Marietta had breached
confidentiality agreements. It also, in effect, delayed a proxy
contest for a year.
Raleigh, N.C.-based Martin Marietta is the second largest
producer of construction aggregates in the U.S. after Vulcan.
It supplies crushed stone, sand and gravel used in building
roads, sidewalks and buildings.
The company operates nearly 300 quarries and distribution
sites in 28 states, the Bahamas and Nova Scotia.
A smaller specialty-products unit produces magnesia-based
chemicals for industry and agriculture and dolomitic lime for
The stock has been volatile. Shares got slammed in mid-May
after hedge-fund titan David Einhorn, co-founder of Greenlight
Capital, warned that earnings gains from the federal fiscal
stimulus was "about to wind down."
Shares turned up in September on at least one analyst's
upgrade following the Fed's comments that new monetary policy
could enable states to start spending more on infrastructure.
They got another bump on Nov. 6 when the company reported that
third-quarter earnings jumped 27% over the prior year to $1.36 a
share. Net sales totaled $539 million, up from $445 million the
Most of the revenue gain was from new operations in the Denver
area from last year's asset swap with Lafarge North America.
Still, CEO Nye cited "several positive trends," including
recovery and growth in residential and the newly passed federal
transportation bill, which means funds for highways "can be
obligated with more certainty."
He noted that the Texas transportation department expects to
more than double the amount of spending in the current fiscal
Texas and North Carolina, he also noted, were among the first
states to apply for funding assistance under TIFIA.
Texas is seeking more than $6 billion, North Carolina more
than $1 billion.
Longbow Research analyst Garik Shmois says the two states are
important to Martin Marietta since they account for 40% of the
"North Carolina is their home state. And they had been
investing in Texas over the last 20 years, in recent years to
capitalize on energy demand," he said.
Martin Marietta has benefited from new roads and other
infrastructure projects tied to Texas oil and gas shale work.
Shmois estimates that TIFIA spending could mean $3 billion a
year to Martin Marietta over five or six years, starting in
Meanwhile, in 2013, he sees demand for Martin Marietta's
products rising 4% over this year, due in large part to
residential and commercial construction.
Residential accounts for 10% of the company's overall volume,
Shmois says, and commercial construction more than 30%.
"We think the commercial piece will be up 6% to 7% and the
residential piece will be up 20% to 30%," Shmois said. "These are
big numbers on residential and on top of that we expect the
company will get a 3% (industrywide) price increase."
Moving The Needle
But the residential portion "doesn't move the needle nearly as
much," Shmois says.
Nye, however, says new housing development "will drive the
need for new shopping centers, offices and retail
He said: "Commercial construction tends to follow residential
by an 18-month lag time."
As for this year, management expects "high-single-digit"
volume growth in nonresidential, driven mainly by shipments to
the energy sector.
Third-quarter shipments of aggregates for residential end use
jumped 14% from the prior year, excluding shipments from
facilities added in the last year.
And while overall volume from such "heritage" facilities --
those owned for at least a year -- fell 3.8%, pricing rose
Analysts surveyed by Thomson Reuters figure Martin Marietta's
earnings will rise 18% this year to $2.22 a share and jump 46% in
2013 and another 31% in 2014.
Meanwhile, the Vulcan merger looms in the background. "The
market clearly believes Vulcan is still in play," said
But Nye remains noncommittal on whether the firm will pursue
Vulcan again, which entails getting the board of directors on its
"If Martin were to try to continue to acquire Vulcan it would
likely take until mid-2014," said analyst Adam Rudiger of Wells
One of the main arguments for the merger was cost synergies.
The aggregates industry is capital intensive. Both Martin
Marietta and Vulcan incur high fixed costs.
But Vulcan is starting to realize savings from new cost
initiatives, so the reason for merging is "less powerful,"
"The more costs it takes out, the fewer synergies there are,"