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Martin Marietta Revs Up On Highway, Home Construction

By: Investor's Business Daily
Posted: 11/28/2012 6:12:00 PM
Referenced Stocks: MLM;VMC

After some crushing news earlier this year, the ground seems to be shifting a little in favor of sand-and-gravel companyMartin Marietta Materials ( MLM ).

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 like."

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 TIFIA.

Incremental Dollars

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 ( VMC ), the No. 1 player in an aggregates industry that has long been consolidating.

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 steel.

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 earlier year.

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 year.

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 company's business.

"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 2014.

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 facilities."

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 4.1%.

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 Shmois.

But Nye remains noncommittal on whether the firm will pursue Vulcan again, which entails getting the board of directors on its side.

"If Martin were to try to continue to acquire Vulcan it would likely take until mid-2014," said analyst Adam Rudiger of Wells Fargo Securities.

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," Rudiger says.

"The more costs it takes out, the fewer synergies there are," he said.