On Jan 28, we maintained a Neutral recommendation on
Vulcan Materials Company
) despite poor third quarter results due to improving housing
Why the Neutral Recommendation?
Vulcan's earnings of 14 cents per share in the third quarter
of 2012 lagged the Zacks Consensus Estimate by 18% due to a
decline in revenues. Revenues declined 4.2% to $728.9 million and
also lagged the Zacks Consensus Estimate by a wide margin.
Revenues were hurt largely due to volume declines in
aggregates as weaker public sector activity was partially offset
by improved private construction work. Management also lowered
its 2012 adjusted EBITDA and aggregates volume guidance.
However, Vulcan is doing a good job of aggressively
controlling costs and also increasing pricing. As a result of all
the cost reduction initiatives, Adjusted EBITDA (excluding real
estate gains) has increased 25% in the nine months of 2012
despite a 1% decline in volumes. Moreover, Vulcan has solid
fundamentals with its geographic diversity and high barriers to
entry for the aggregates industry.
Though sluggish of late, management is expecting solid growth
in aggregates demand in 2013 as private construction demand is
expected to continue rising. As the new home construction market
recovers, the demand for the company's products is expected to go
The company is seeing improvement in key markets like Fla.,
Texas and Ariz. as private construction activity, specifically
residential housing, starts and contract awards for
nonresidential buildings, continue to improve.
The demand for highway construction is also expected to grow
modestly with increased funding certainty from the new highway
bill. A new multi-year highway bill was passed by the Congress in
Jul 2012. The bill is intended to provide the state transport
departments with highway funding certainty, thus increasing
demand for highway construction.
The federal government has yet to review and approve the bill.
Though the passage of the bill did not have any material impact
on the third quarter volumes, it is expected to boost demand for
highway construction in the long term, which in turn will benefit
Vulcan's volumes. Thus we have a Neutral recommendation on the
stock despite poor quarterly results.
Other Stocks to Consider
Vulcan carries a Zacks Rank #3 (Hold). Other stocks in the
building materials sector that are worth considering include
Eagle Materials Inc.
- Zacks Rank #1 (Strong Buy) and
Texas Industries Inc.
) - Zacks Rank #2 (Buy). In the broader housing construction
) carries a Zacks Rank #2 (Buy).
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