2 Concrete & Aggregates Stocks to Watch Amid Industry Headwinds
Rising raw material costs, housing market slowdown, supply-chain disruptions, and higher labor and transportation costs are some of the hurdles for the Zacks Building Products - Concrete & Aggregates industry players. Nonetheless, a boost in infrastructural and public construction spending should continue to act as a major tailwind. An improving non-residential construction market and favorable pricing dynamics have also been aiding companies in navigating hard times. Prominent names in the industry, like Vulcan Materials Company VMC and Eagle Materials Inc. EXP, have been gaining from the positives.
The Zacks Building Products - Concrete & Aggregates industry consists of manufacturers, distributors and sellers of construction materials like aggregates and concrete along with other related items for public infrastructure, residential and non-residential, as well as other end markets. The materials also include gypsum wallboard, recycled paperboard, concrete blocks, ready-mix concrete, and oil and gas proppants. The industry players are also involved in designing, engineering, manufacturing, marketing, and installation of external building products for commercial, residential, and repair and remodel markets in domestic as well as international markets.
3 Trends Shaping the Future of Concrete & Aggregates Industry
Fluctuation in Input Prices, Weather Woes, Residential Slowdown, & Shortage of Skilled Labors: The industry players are struggling with escalating material expenses, the shortage of skilled laborers and rising wage costs. The companies use electricity, diesel fuel, liquid asphalt and other petroleum-based resources. Hence, supply-related woes and significant fluctuations in the prices of these resources affect operating results. Also, the businesses are exposed to weather-related risks that affect production schedules and hence profitability. Excessive rainfall, flooding or severe droughts jeopardize shipments and production. The first and fourth quarters are mostly affected by winter. Again, hurricanes in the Atlantic Ocean and Gulf Coast are most active during these quarters. These impediments may continue to bump up costs and mar the industry participants’ profits. This apart, the recent slowdown in the residential market is causing a downdraft in wallboard, cement and other products of the industry, thereby weighing on companies’ performance. Notably, rising mortgage rates and home prices have been prompting a moderation in housing demand.
Focus on Reviving Infrastructure: On Nov 15, 2021, President Joe Biden signed a bipartisan infrastructure bill of $550 billion, in addition to the approved funds of $450 billion for five years in August. Total spending may go up to $1.2 trillion if the plan is extended to eight years. This bill comprises new investments in almost every infrastructure sector over the next five-year period, including transportation, energy, broadband and water. Out of the total allotted spending, the infrastructure development law will provide $100 billion toward roads, bridges and other major projects. It will invest $66 billion in freight and passenger rail, including potential upgrades to Amtrak. The project will allocate $11 billion to reducing car crashes and fatalities through a “Safe Streets for All” program. The Biden administration’s endeavor to pump money for rebuilding the nation's roads, bridges and other infrastructure would give construction companies like Vulcan, Martin Marietta and others a solid foundation for growth.
Acquisitions & Focus on Operating Efficiency: The industry participants follow a well-chalked-out acquisition plan to enhance domestic and international portfolios. Moreover, companies are increasingly focusing on reducing controllable costs and maximizing operating efficiency across business lines to generate higher earnings and cash flows. The industry players have also been experiencing a solid pricing environment across their product portfolios, thereby helping to boost margins.
Zacks Industry Rank Indicates Dull Prospects
The Zacks Building Products - Concrete & Aggregates industry is an eight-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #224, which places it in the bottom 10% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bleak near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a weak earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s bottom-line growth potential. Since December 2022, the industry’s earnings estimates for 2023 have moved downward to $2.09 per share from $2.15.
Despite the industry’s gloomy near-term view, we will present a few stocks that one may consider adding to the portfolio. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.
Industry Lags Sector, Outperforms S&P 500
The Zacks Building Products - Concrete & Aggregates industry has lagged the broader Zacks Construction sector but outperformed the Zacks S&P 500 composite over the past year.
Stocks in this industry have collectively lost 8.8% versus the broader sector’s decline of 4.5% over the past year. Meanwhile, the S&P 500 has slipped 11.1% in the same period.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price to earnings, which is a commonly used multiple for valuing Building Products - Concrete & Aggregates stocks, the industry is currently trading at 17.6X versus the S&P 500’s 18.3X and the sector’s 18.3X.
Over the past five years, the industry has traded as high as 24.5X, as low as 13.5X and at a median of 18.5X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
2 Concrete & Aggregates Stocks to Keep a Close Eye On
None of the stocks in the Zacks Concrete & Aggregates universe currently carries a Zacks Rank #1 (Strong Buy) or 2 (Buy). Below, we have discussed two stocks from the industry that have solid earnings growth potential. The chosen companies currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
Vulcan Materials Company: This Birmingham, AL-based company produces and supplies construction aggregates, asphalt mix as well as ready-mixed concrete. The company’s focus on four strategic initiatives — Commercial Excellence, Operational Excellence, Strategic Sourcing, and Logistics Innovation — should enhance price performance as well as operating efficiencies. Vulcan Materials has been generating higher earnings on the back of prudent cost-control efforts and increased pricing in aggregates. Its focus on a systematic inorganic strategy for expansion is adding to the positives. Overall, improving private non-residential construction, solid infrastructure investment and favorable pricing dynamics have been driving growth.
Vulcan currently carries a Zacks Rank #3. The company’s shares have dropped 6.9% over the past year. Earnings for 2023 are expected to grow 24.5%.
Price and Consensus: VMC
Eagle Materials Inc.: This Dallas, TX-based company produces and supplies heavy construction materials, light building materials, and materials used for oil and natural gas extraction in the United States. Improved cement, concrete and aggregates sales volume as well as a solid contribution from the recently acquired businesses are aiding the company’s growth. Higher pricing is adding to the positives.
Eagle Materials currently carries a Zacks Rank #3 and has lost 3.9% in the past year. Earnings for fiscal 2023 are expected to grow 31.8%.
Price and Consensus: EXP
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