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2 Concrete & Aggregates Stocks to Watch in a Challenging Industry

Uncertainties in the macroeconomic landscape, weather-related issues, and increased labor costs pose challenges for the Zacks Building Products - Concrete & Aggregates industry. The Federal Reserve's recent decision to maintain high interest rates and reduce the expected number of rate cuts this year from three to one can impact the industry players.

Nonetheless, an uptick in spending on infrastructure and public construction is set to continue driving growth in the industry. The industry is also poised to benefit from improvements in the single-family residential construction market and advantageous pricing dynamics amid difficult conditions. Companies like Martin Marietta Materials, Inc. MLM and Vulcan Materials Company VMC have been leveraging these favorable trends to their advantage.

Industry Description

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.

4 Trends Shaping the Future of Concrete & Aggregates Industry

Fed's Decision of Only One Rate Cut This Year: The Federal Reserve’s decision to implement only one rate cut this year likely means a relatively tight monetary policy stance. With the benchmark interest rate holding at 5.25%-5.50%, financing costs for infrastructure projects will remain elevated, potentially slowing down new constructions and expansions, thereby creating a cautious economic environment. Companies in this sector should prepare for these conditions by optimizing their operations, carefully planning capital expenditures, and closely monitoring economic indicators to adjust their strategies accordingly.

Fluctuation in Input Prices, Weather Woes & 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, businesses are exposed to weather-related risks affecting production schedules and 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 bump up costs and mar the industry participants’ profits.

Focus on Reviving Infrastructure: The Infrastructure Investment and Jobs Act, the Creating Helpful Incentives to Produce Semiconductors and Science Act, and the Inflation Reduction Act collectively signify a substantial commitment to bolstering American competitiveness. These three enacted laws are aimed at revitalizing American infrastructure, expediting the shift toward a sustainable economy, and fortifying the domestic semiconductor sector. These bills comprise new investments in almost every infrastructure sector, including transportation, energy, broadband and water. The U.S. administration’s endeavor to pump money for rebuilding the nation's roads, bridges and other infrastructure would give construction companies 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 Bleak Prospects

The Zacks Building Products - Concrete & Aggregates industry is a nine-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #154, which places it in the bottom 38% 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 dull 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.

Despite the industry’s blurred near-term view, we will present a few stocks that one may consider adding to their portfolio. Before that, it’s worth taking a look at the industry’s shareholder returns and current valuation.

Industry Outperforms S&P 500, Lags Sector

The Zacks Building Products - Concrete & Aggregates industry has outperformed the Zacks S&P 500 Composite but lagged the broader Zacks Construction sector over the past year.

Stocks in this industry have collectively gained 17.2% versus the broader sector’s rise of 30.1% over the past year. Meanwhile, the S&P 500 has gained 16.4% 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 18X versus the S&P 500’s 20.6X and the sector’s 16.5X.

Over the past five years, the industry has traded as high as 24.8X, as low as 14X and at a median of 20.1X, as the chart below shows.

Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500

2 Concrete & Aggregates Stocks to Keep an Eye On

Below, we have discussed two stocks from the Zacks Concrete & Aggregates universe that have solid growth potential. The chosen companies currently carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Martin Marietta Materials: Based in Raleigh, NC, Martin Marietta produces and supplies construction aggregates as well as other heavy building materials — mainly cement — in the United States. Martin Marietta is poised for a promising 2024, driven by robust market fundamentals and long-term growth trends in public works, non-residential, and residential construction. Significant demand in public infrastructure, US-based manufacturing, energy projects, and data center construction will offset short-term dips in warehouse, light non-residential and residential markets. The Infrastructure Investment and Jobs Act will boost infrastructure projects, with public highway and street construction expected to surge 16% to $126 billion. As affordability improves, the housing market recovery will further support MLM’s growth, ensuring a strong year ahead. Also, proficient acquisitions have been enhancing its reach in new geographies for consistent industry-leading growth.

Shares of Martin Marietta have gained 30.3% in the past year. Earnings estimates for 2024 have increased to $23.58 per share from $21.92 over the past 30 days. This depicts analysts’ optimism over the company’s prospects. Also, earnings for 2024 are expected to grow 22.1%. It has a three-to-five-year expected EPS growth rate of 9.8%.

Price and Consensus: MLM

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 and 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 single-family residential and private non-residential construction, large industrial project demand, solid infrastructure investment and favorable pricing dynamics should drive growth.

Shares of Vulcan have rallied 20% in the past year. Earnings estimates for 2024 have increased to $8.54 per share from $8.51 over the past 30 days. Also, earnings for 2024 are expected to rise 22%. It has a three-to-five-year expected EPS growth rate of 15.7%. It also has a favorable VGM Score of B, making it a potentially interesting investment opportunity.

Price and Consensus: VMC

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