Vulcan Materials Company VMC has been banking on solid demand in the residential and private non-residential construction activity and robust pricing actions. Also, strategic disciplines, impressive Aggregates business prospects, solid infrastructure investment and accretive buyouts are adding to the bliss.
However, it has been grappling with supply chain issues and persistent rise in material prices and labor shortages. The Concrete and Aggregates players witnessed intense volatility in energy markets, continuous rise in diesel prices and higher liquid asphalt input costs.
Supporting Growth Factors
Solid Residential & Non-Residential Markets: Increasing public construction demand and a resurgence in demand on the private side, mainly residential, have been benefiting Vulcan and other industry players like Summit Materials, Inc. SUM, Martin Marietta Materials, Inc. MLM and Eagle Materials Inc. EXP. Even projects that were paused at the onset of the coronavirus pandemic have started executing on their backlog of projects.
Vulcan has been witnessing strong pricing, underpinned by growing public demand (mainly transport) and operational discipline. Public sector construction includes federal, state and local government spending on constructing highways, bridges, airports, dams, roads and other infrastructure construction.
On the federal front, the Senate’s approval of President Biden’s $1-trillion infrastructure plan in August 2021 is a significant growth driver for Vulcan. Continuous recovery in these fundamentals points to construction activity stabilization throughout 2022 and beyond.
Private consumer demand also strengthened in the past year, especially residential construction. Privately-funded construction accounted for approximately 58% of total aggregate shipments in 2021. Residential construction continues to be the strongest end market, backed by growth in starts in both single-family and multifamily housing. There is pent-up demand for houses and new subdivisions driven by desirable mortgage rates and the desire to own a home.
Long-Term Strategic Moves: The company remains focused on creating long-term value by compounding unit margins through four strategic initiatives — Commercial Excellence, Operational Excellence, Strategic Sourcing and Logistics Innovation — that enhance price growth and operating efficiencies. Higher price realizations and its four strategic initiatives should continue to increase unit profitability.
Regardless of volume swings, the company intends to improve unit profitability in aggregates. Improvement in pricing, volumes and operating efficiencies helped it achieve 5% growth in unit profitability and 10% improvement in adjusted EBITDA in 2021. The trend continued in first-half 2022 as well. In the trailing 12 months period, adjusted EBITDA rose 13% despite the higher energy-related costs. Aggregates' cash gross profit per ton improved in 15 of the last 16 quarters, excluding the impact of selling-acquired inventory.
Inorganic Drive: Since becoming a public company in 1956, Vulcan has followed a systematic inorganic strategy for expansion and has wrapped up various bolt-on acquisitions that contributed significantly to its growth. In first-half 2022, the company acquired five aggregates facilities in Texas, and four ready-mixed concrete facilities and two idle ready-mixed concrete sites in Virginia for $233.5 million.
In 2022, Vulcan expects to spend between $600 and $650 million on capital expenditures, including growth and capacity-adding projects. The company invested $465 million in 2021.
Strong Aggregates Business: in second quarter, revenues from the segment increased 24.6% year over year, owing to higher demand across all end-market segments. Aggregate shipments (volumes) also increased 9% year over year (up 2% on a same-store basis). Strong demand and a positive pricing environment across the globe supported growth.
For the quarter, freight-adjusted average sales price inched up 9% (10% on a mix-adjusted basis) from the prior-year level. Freight-adjusted revenues also rose 18.6% from the prior-year quarter to $1,036.6 million.
Industry Woes Ail
Since 2021, the company has been facing supply woes and inflationary pressures, particularly in energy and labor. Energy inflation was a significant headwind in 2021 and first-quarter 2022. Labor constraints have also caused delays and inefficiencies in operations. The company anticipates these headwinds to persist.
The company uses large amounts of electricity, diesel fuel, liquid asphalt and other petroleum-based resources, subject to potential supply constraints and significant price fluctuation, which could affect operating results and profitability. Variability in the supply and prices of these resources could affect the company’s operating costs and the rising costs could erode profitability.
Vulcan is susceptible to bad weather conditions, including hurricanes, tornadoes and other weather events, as most of its products are used outdoors in the public or private construction industry. Also, the company’s production and distribution facilities are located outdoors. Inclement weather affects both the company’s ability to produce and distribute products and affects demand as construction work can be hampered by weather.
A Brief Overview of Above-Mentioned Stocks
Summit Materials: The construction material company is based in Denver, CO. Migration activity amid the pandemic continues to favor rural and exurban markets. Additionally, the strong execution of its Elevate Summit strategy and higher average selling prices for aggregates have been aiding the company to drive growth. SUM remains focused on sustainable improvement via investments in green fields and end markets that are underpinned by sturdy growth fundamentals.
Estimates for Summit Materials’ 2022 earnings indicate year-over-year growth of 24.1%.
Martin Marietta: Based in Raleigh, NC, Martin Marietta produces and supplies construction aggregates as well as other heavy building materials — mainly cement — in the United States. Expanded infrastructure investment along with recovering private non-residential markets and heavy industrial projects of scale are expected to support near-term shipment levels. Also, the Lehigh West Region and Tiller buyouts will enhance its reach in new geographies for persistent industry-leading growth.
Estimates for Martin Marietta’s 2022 earnings suggest year-over-year growth of 8.1%.
Eagle Materials: This Dallas, TX-based company is benefiting from the improved cement, concrete and aggregates sales volume as well as the solid contribution from the recently acquired Kosmos Cement business. Higher pricing is adding to the positives.
Earnings estimates for fiscal 2023 suggest 24.9% year-over-year growth.
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