Photographer: Monty Rakusen

More New U.S. Roads Paving Way for Vulcan Materials’ Stock Rise

Vulcan Materials Co.’s stock is leading the broader market as investors bet rising sales and cost cutting will buoy its profitability.

Shares of the Birmingham, Alabama-based company have outpaced the Standard & Poor’s 500 Index by 49 percentage points since Oct. 8, when the stock-price ratio fell to a 14-month low -- see chart. Vulcan’s stock closed at $90.28 on May 26, while the benchmark index was at 2,104.20.

The company produces construction aggregates -- primarily crushed stone, sand and gravel -- used in building and repairing roads, accounting for about 73 percent of total revenue in 2014, according to Sonia Baldeira, an analyst at Bloomberg Intelligence.

“Large gains in the share price are attributable to accelerating sales trends and rigorous cost controls that are driving a robust increase in profitability,” said Robert Wetenhall, an analyst at RBC Capital Markets LLC in New York.

EBITDA margins -- earnings before interest, tax, depreciation and amortization divided by sales -- rose to 21.9 percent last year, the highest since 2008, according to Wetenhall’s calculations. He forecasts this measure of profitability, which excludes freight revenue and is adjusted for one-time items such as restructuring costs, will increase to 26.3 percent this year.

Sales Growth

Industry-wide demand could continue to increase as “we’re in the early stages of a multi-year recovery,” Wetenhall said. He upgraded his recommendation on the stock to outperform from sector perform in February primarily because aggregates sales growth will accelerate to 18.6 percent this year from 13.9 percent in 2014, according to his estimates.

Another reason for investors to have a bullish outlook is a potential boost for Vulcan from a rise in new housing starts, said Robert Pavlik, who helps oversee $9 billion as chief market strategist at Boston Private Wealth in Boston. That’s because the construction of a new home requires about 120 tons of aggregates for the driveway, roof and foundation, he said.

“Vulcan is well positioned to benefit from the uptrend in housing starts,” Pavlik said, adding that this is one reason his portfolio bought the stock in February. Housing starts jumped 20.2 percent in April to a 1.14 million annualized rate, the most since November 2007, according to the Commerce Department.

Public Sector

While new residential construction makes up about 17 percent of Vulcan’s total revenue, the public sector -- federal, state and municipal governments -- accounts for about 50 percent, Wetenhall estimates. Such projects also require significantly more material than the housing industry, with 85,000 tons of aggregate used for one mile of a four-lane highway, according to Pavlik.

An improvement in state and municipal finances is driving stronger demand for aggregates, as “spending on roads has increased in tandem with a rise in tax receipts,” Wetenhall said. Meanwhile, federal spending on infrastructure hasn’t improved much and expectations for these expenditures “remain muted due to political gridlock.”

Congress voted last week to extend federal reimbursement to states for transportation spending through July. The Highway Trust Fund’s authority had been scheduled to expire May 31. Lawmakers are working on a longer-term funding measure that would address an estimated $58 billion annual shortfall. Many oppose raising the federal gasoline tax that provides most of the money for the trust fund.

Federal Reimbursements

Total federal, state and local government spending on highways rose 3 percent last year and could increase 4 percent this year, according to estimates from Vulcan. During the past decade, federal reimbursements have made up about 52 percent of capital outlays for the 50 states’ departments of transportation, so “the federal program is extremely important to the actual construction market,” said Alison Black, chief economist for the American Road and Transportation Builders Association, a Washington-based trade group.

“Amidst all this frustration at the federal level, there are some encouraging news at the state and local level,” as several states are increasing their infrastructure funding, John McPherson, Vulcan’s chief financial officer, said on a May 5 conference call.

In the last 18 months, 10 states and Washington D.C. have passed tax increases to bolster highway spending, according to figures from the company. Tax revenue in states where Vulcan does business -- including California, Florida and Pennsylvania -- grew 6 percent in the first quarter from a year ago, following a 3 percent gain for all of 2014, according to figures from the company.

Technical Analysis

The improving fundamentals for Vulcan are underscored by bullish technical analysis, according to Jim Stellakis, founder and director of research at Technical Alpha Inc. in Greenwich, Connecticut. The longer-term trend -- see chart -- “looks good” as the ratio of Vulcan’s stock price to the S&P 500 is continuing its steady rise, he said. Investors are allocating more money to Vulcan shares relative to the broader market, as its stock has outpaced the benchmark index by 35 percentage points year-to-date.

In addition to cost-cutting, the new management team’s increased emphasis on returning cash to shareholders “has left a favorable impression with investors,” Wetenhall said. On Feb. 17, the company declared a quarterly dividend of 10 cents a share on its common stock, representing a 4-cent increase.

“Vulcan’s doing a lot of things well that investors are positively reacting to,” Wetenhall said.

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