Vulcan Materials Poised Well for 2014 - Analyst Blog

On Apr 10, 2014, we issued an updated research report on Vulcan Materials Company VMC.

The Zacks Rank #1 (Strong Buy) company's second-half 2013 revenues and profits increased significantly from the first half as improving private construction activity and better weather conditions markedly raised volumes in all segments. Improved volumes favored pricing across most of its markets. Volumes improved 8% in the second half.

Additionally, most of the volume and pricing increase was noted in the aggregates segment, which was sluggish in 2012 as well as in the first half of 2013. Strong volume and pricing growth coupled with aggressive cost control also significantly improved earnings and profitability in the second half.

In fact, aggregates shipments grew 4% in 2013, a significant improvement from declines of 1% and 3% witnessed in 2012 and 2011, respectively. Encouragingly, 2013 was the first year of aggregates volume growth since 2005. Management expects aggregates demand and volumes to increase in 2014 led by private construction projects. Strong growth potential in Vulcan's served markets and the meaningful operating leverage that exists in the aggregates business are expected to drive earnings growth and cash generation in 2014 as volumes improve.

Further, Vulcan's Profit Enhancement Plan implemented over the past two years has increased adjusted EBITDA by $116 million, generated more than $1 billion from the sales of non-strategic assets and future sales production agreements, and reduced total debt approximately $800 million.  Also, in Feb 2012, the company committed to generate $500 million in proceeds from the sale of non-strategic assets. However, the company comfortably exceeded the goal by generating over $1 billion including the transaction with Argos.

In Mar 2014, the company sold its cement and concrete businesses in the Florida area to Cementos Argos for $720 million. In addition, the company strengthened the core aggregates business through the acquisition of reserves and quarries in California, Georgia, Texas and Virginia.

However, though growing demand in the private construction market is boosting aggregates volumes, the company has limited visibility on growth in aggregates demand in public construction, including highways and other infrastructure projects. Further, the current two-year federal highway bill expires at the end of Sep 2014, creating uncertainty around funding for highway construction. This could hurt aggregates volume in the public sector and prove to be a drag on the company's growth prospects.

Other Stocks to Consider

Other building stocks worth considering include United Rentals, Inc. URI, Gibraltar Industries, Inc. ROCK and William Lyon Homes WLH. While William Lyon enjoys the same rank as Vulcan Materials, United Rentals and Gibraltar Industries carry a Zacks Rank #2 (Buy).