Biden infrastructure plan
According to Jefferies, an infrastructure deal between the Biden administration and a two-party coalition of senators marks a “major stride ahead” and a good move for both materials firms.
Analyst Philip Ng said on Friday that if some form of a physical infrastructure bill is passed, gravel supplier Martin Marietta Materials and cement maker Vulcan Materials should both see an increase in sales.
Jefferies upgraded both stocks to buy and raised their price targets on both materials companies.
With the market concerned about “peak earnings for cyclicals,” Ng believes MLM and VMC are well-positioned to benefit from a potential infrastructure bill and recovery in nonresidential construction.
After weeks of talks, the White House and a bipartisan group of senators announced on Thursday that they had reached an agreement on a policy framework for a physical infrastructure bill.
The plan would spend $973 billion over five years, or $1.2 trillion if extended for an additional eight years, on a package that would fund road, bridge, and airport improvements, as well as increased construction for waterways, electric vehicles, and broadband.
While the plan’s details are still being worked out, preliminary estimates of the infrastructure bill’s spending include a $109 billion increase for roads and bridges. This type of investment, spread over five to eight years, could boost materials industry demand by 5% to 8% per year, according to Jefferies.
Analyst Ng added that given their exposure to nonresidential construction, Vulcan and Martin Marietta’s equity looks especially appealing in comparison to other materials companies.
The nonresidential industry “is showing green shoots, with MLM noting increased bidding activity and pricing inquiries for light commercial,” he wrote. “With 34-40% of MLM and VMC sales in nonres, they have great leverage to a commercial recovery and could provide upside in 2H21 / 2022.”
As the US economy recovers from the Covid-19 pandemic, both stocks have already posted strong returns for 2021: Vulcan is up 19.3 percent and Martin Marietta is up 26.7 percent since January.
Nonetheless, Jefferies sees more upside ahead for Martin Marietta, with a price target of $424 per share and $207 per share for Vulcan. These two price targets imply an 18% increase in each stock from Thursday’s close.
In midmorning trading on Friday, Vulcan was up 0.85 percent, while Martin Marietta was up 0.3 percent.
UBS upgrades United Rentals (NYSE: URI)
“We believe the infrastructure stimulus agreement reached in Congress will drive a faster than expected recovery in URI’s business, as construction spending accelerates,” said analyst Steven Fisher in a note issued Friday.
Non-residential construction spending is expected to grow 5.4 percent in 2022, after falling 4.6 percent this year, according to UBS. United Rental’s earnings are expected to grow through at least 2023, according to the firm.
The bank raised its price target for the stock to $375, representing an 18.4 percent increase over United Rental’s closing price on Thursday.
UBS believes the company will have multiple growth paths in the coming years, reducing the risk of the infrastructure deal failing, short-term supply chain issues, and inflation.
“In addition to underlying construction spending growth, URI is organically expanding its business by introducing more Specialty products and services,” Fisher said.
On Tuesday, Citi upgraded United Rental to a buy rating.
United Rental stock is down 5.1 percent in June, but up 36.6 percent this year.