INVESTMENT THESIS
Vulcan Materials Co. (NYSE: VMC) is HOLD. The balance sheet is solid. Our issue is with valuation, as a recent rally in the shares has lifted most valuation multiples to the high end of their historical ranges. Our long-term rating remains BUY, and we will look to raise our 12-month view if earnings growth improves or the shares fall back toward support near $112.
RECENT DEVELOPMENTS
On November 5, VMC posted adjusted diluted EPS from continuing operations of $1.56, down from $1.68 in 3Q19 and below our estimate of $1.62. Total third-quarter revenue fell 8% to $1.3 billion. The adjusted EBITDA margin was 30.8%, up 210 basis points. In the first nine months, the company earned $3.62 per share.
On the conference call, management said that the company has maintained steady growth and profitability during the pandemic. It also noted that residential construction activity has rebounded while private nonresidential activity has been weak. It now expects 2020 adjusted EBITDA of $1.285-$1.315 billion, which assumes lower shipments. Its prepandemic guidance had called for 2020 adjusted EBITDA of $1.385-$1.485 billion. Capital expenditures in 3Q were $52.0 million ($228.9 million year-to-date).
EARNINGS & GROWTH ANALYSIS
Vulcan has two segments: Aggregates (96% of sales) and Asphalt (4%). Recent updates and outlooks for these segments are summarized below:
In the Aggregates segment, 3Q gross profit was $338 million, compared to $357 million a year earlier. Unit profitability rose 3% from the prior year to $6.04 per ton. Shipments fell 8% to 56.9 million tons due to the pandemic, along with the impact of wet weather and wildfires. Sales fell 7% to $1.049 billion and the freight-adjusted sales price rose 2% to $14.44 per ton.
The gross profit for concrete fell 19% to $12.2 million. Concrete shipments decreased 11%, while the average concrete selling price rose 3%. For calcium, both shipments and pricing fell from the prior year.
Management keeps an eye on costs. In 3Q, the adjusted EBITDA margin was 30.8%, up 210 basis points.
FINANCIAL STRENGTH & DIVIDEND
In September, the company entered into a $1 billion line of credit. At September 30, 2020, it had available borrowing capacity of $943.4 million under this credit line.
Vulcan pays a dividend. In February 2020, it raised its quarterly dividend by 10% to $0.34 per share, or $1.36 annually.
The company has a share buyback program. Year-to-date, the company has repurchased $26.1 million in common stock.
MANAGEMENT & RISKS
Tom Hill has been Vulcan’s chairman and CEO since 2014. He joined the company in 1979. Thompson S. Baker, formerly senior vice president, became the company’s COO in May 2019. The CFO is Suzanne H. Wood.
Investors in VMC shares face risks. Vulcan’s earnings are subject to trends in highway, commercial, and residential construction, and are thus highly cyclical. Approximately half of the company’s sales of aggregates come from publicly funded projects, so weak federal and state budgets are a concern. The company also faces operational risks related to cost inflation, competition, and environmental and legal issues.
COMPANY DESCRIPTION
The company operates primarily in the U.S., with operations in 20 states, as well as in Mexico. Founded in 1909, the company was formerly known as Virginia Holdco and changed its name to Vulcan Materials in November 2007.
VALUATION
We expect Vulcan to continue to benefit from growth in highway/infrastructure, residential, and commercial construction, as well as from its recent acquisitions and presence in high-growth geographic markets. However, the coronavirus pandemic and trade tensions have lowered the multiples that investors have been willing to pay for earnings.
On December 9, HOLD-rated VMC closed at $141.75, down $2.70.
Source: Argus
