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.
VULCAN MATLS CO (VMC): Free Stock Analysis
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