America's largest producer of crushed stone, sand and gravel
appears as if it could get crushed itself.
Concrete and asphalt maker
Vulcan Materials (
recently reported disappointing second quarter results below
analysts' expectations. Higher material costs and lower product
pricing negatively affected the results.
Based in part on the poor second-quarter results, S&P rating
services reduced Vulcan's
to "BBB-" from "BBB." S&P also forecasts the company's
performance "will not match the expectations for the upcoming
The slow housing market has especially hurt Vulcan. The company's
biggest markets are in Florida and California -- among the hardest
hit real estate markets in the country.
But the housing slump isn't limited to the east and west coasts.
From April to May 2010, new homes sales across the United States
dropped a record -33%, the largest decline ever recorded. Data for
June and July shows the situation is not quickly improving. And as
home building declines, so do Vulcan's sales.
In an attempt to stabilize revenue, the company has been shifting
from private to publicly-funded infrastructure projects. However,
it is uncertain whether the U.S government will limit highway
construction to focus on reducing greenhouse emissions. With
limited roadway construction, Vulcan could see further revenue
Technically, the stock appears vulnerable.
The stock is in an intermediate-term downtrend. Upon releasing poor
during the August 2nd trading week, the stock broke its major
uptrend dating back to its March 2009 low. This trend line, which
intersects near $42.50, now represents important resistance.
Major resistance lies near $60. In September 2009, Vulcan tested
this resistance level. The stock unsuccessfully tested this level
again in May 2010. During this time, the major downtrend line --
which has been forming since September 2008 -- merged with
resistance around $60. The major downtrend line now intersects with
, near $57.
Unable to break resistance or the major downtrend line in May of
this year, VMC formed an intermediate-term downtrend. The stock has
been falling since.
VMC just breached support near $39. The lower Bollinger band
intersects at this level.
Nearby support is at $37.55. This level marks the intersection of
the lower channel line. However, if support does not hold here, the
stock could tumble to its March 2009 low of $33.38.
VMC is currently well below both the falling 10- and 30-week moving
averages. In early July, the 10-week moving average bearishly
crossed below the 30-week moving average.
The indicators are bearish. In June,
gave a significant sell signal that occurred near the 0-mark.
Between June and August, it appeared the sell signal was reversing.
But in early August, the sell signal was reaffirmed. The MACD
histogram continues to build in negative territory.
Since July 2008, the
relative strength index (RSI)
was in a major uptrend. However, this uptrend has just been broken.
At 35.2 and falling, the indicator has dropped below the key 50
level, but is not yet deeply oversold.
is deeply oversold, it remains on a significant sell signal. Both
%K and %D are falling and appear to be approaching a level of
support; however, until support is established, an upturn is
Vulcan's fundamental outlook is also bumpy.
On August 3rd, the company reported disappointing second-quarter
results that were below analysts' expectations.
Revenue for the quarter was -2.3% below Wall Street expectations of
$753.1 million. Sales totaled $736.1 million, a small +2% gain from
$721.9 million in the year-ago period.
In July, the 13 analysts following the company projected full year
2010 revenue would remain essentially flat at $2.7 billion.
Analysts have since revised their estimates downward. They now
expect revenue to drop -3.3% to $2.6 billion. Reduced sales of
construction material, combined with higher costs to produce these
goods, will likely contribute to the expected decline.
By 2011, analysts expect Vulcan will see a +8.6% revenue gain with
sales of $2.8 billion. However, this positive outlook is dependent
on strong growth in the construction and infrastructure industries
which, given the economic outlook, remains highly uncertain.
The earnings outlook is also muted.
For the most recent second quarter, analysts projected a profit of
$0.23. Instead, the company reported a loss of -$0.19, compared to
a $0.14 profit in the year-ago quarter. The loss was largely due to
a hefty one-time $41 million lawsuit settlement with the Illinois
Department of Transportation. However, rising construction costs
and lower pricing of products also negatively impacted the company.
With weakened demand for Vulcan's products, analysts expect the
company will report a loss for the full 2010 year. Analysts project
earnings will fall to -$0.41. By comparison, earnings were $0.16 a
share in 2009.
For 2011, the 17 analysts reviewing the company have a very mixed
outlook. The lowest analyst estimate pegs Vulcan with a loss of
-$0.43. However, the highest analyst estimate is for the company to
earn a $1.45 profit. Given the weakening
, I believe the high-end estimates are overly optimistic.
In addition to a potentially weak growth outlook, Vulcan is also
richly valued based on its high forward price-to-earnings (P/E)
ratio of 95.8.
By comparison, competitor
Martin Marietta Materials (
has a forward
of 23.5. Although this P/E is somewhat high, it is about one third
MDU Resources (
, another competitor, has a forward P/E of 11.9.
Action to Take -->
Given that Vulcan is richly valued, has an uncertain fundamental
outlook and is technically vulnerable, I think this aggregate
materials producer is a good stock to short. I would set a target
near $33.38, support established by the stock's 2009 low, and a
stop-loss at $42.57 -- resistance marked by the broken major
-- Dr. Melvin Pasternak
Dr. Melvin Pasternak is one of the most experienced market
technicians in nation and Chief Trading Expert behind Double-Digit
Trading. He has over 25 years experience... Read more.
Disclosure: Neither Melvin Pasternak nor StreetAuthority, LLC
hold positions in any securities mentioned in this article.
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