Vulcan Materials' Acquisitions Bode Well, Weather Woes Stay

On May 23, we issued an updated research report on Vulcan Materials Company (NYSE:VMC) – engaged in the production, distribution and sale of construction aggregates and other construction materials.

The company’s strong aggregate reserve position, pricing power, bolt-on acquisitions and significant debt reduction are encouraging. However, seasonal influences on construction activity could weigh on the company’s performance.

Vulcan Materials’ shares have gained 5% in the last three months, outperforming the Zacks categorized Building-Cement/Concrete/AG industry’s gain of 3.3%. Earnings estimates for the current quarter moved north by 4.2% in the last 30 days, while that for the current year inched 2.5% higher. This reflects ongoing optimism in the stock.



Q1 Highlights

Vulcan Materials’ first-quarter 2017 adjusted earnings of 34 cents per share beat the Zacks Consensus Estimate by 54.5%. However, the bottom line deteriorated 17.1% from the prior-year quarter.

Total revenue of $787.3 million also surpassed the Zacks Consensus Estimate by 4.1% and increased 4% from the prior-year quarter. Revenues improved at the Asphalt Mix and Concrete segment and declined at the Calcium segment.

Aggregates shipments (volumes) decreased 2% due to California's wet weather conditions. This along with floods halted construction activity and impaired shipments in January as well as February.

Adjusted gross margin decreased 210 basis points while adjusted EBITDA contracted 4% year over year.

Major Positives

Vulcan Materials has been expanding its footprint and reserve positions in the best markets of America via acquisitions. The company has completed 14 acquisitions and swaps since 2013. These buyouts enhance its ability to serve customers and bring in operational and commercial synergies.

Sustained growth in private construction activity improves the demand for both aggregates as well as non-aggregate businesses of Vulcan Materials. Positives like an improving economy, modest wage growth, low unemployment levels, positive consumer confidence and a tight supply situation raise optimism about the sector’s performance in 2017. As such, demand for Vulcan Materials’ products should increase as well, thereby driving revenues.

Adverse Factors

Seasonal influences on construction activity, particularly slowing demand trends in California, could continue to weigh on the company’s performance. After lagging expectations in 2016, California shipments were down 20% in the first two months of 2017 due to record rainfall.

Vulcan Materials’ valuation looks a bit stretched when compared to the broader market. Looking at the company’s price-to-earnings (P/E) ratio, the company currently has a trailing 12-month P/E ratio of 43.17, higher than the S&P 500 index’s average of 19.89. Also, the company’s trailing 12-month return on equity (ROE) of 8.80% compares unfavorably with the ROE of 15.63% for the S&P 500, reflecting its inefficiency in using shareholders’ funds.

Zacks Rank & Stocks to Consider

Vulcan Materials carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the industry include Lyon William Homes (NYSE:WLH) , M/I Homes, Inc. (NYSE:MHO) and KB Home (NYSE:KBH) .

Lyon William and M/I Homes sport a Zacks Rank #1 (Strong Buy). Full-year 2017 earnings for Lyon William are expected to increase 38.2%, while that of M/I Homes is likely to rise 36.2%. You can see the complete list of today’s Zacks #1 Rank stocks here.

KB Home, a Zacks Rank #2 (Buy) stock, is expected to witness 43.2% growth in fiscal 2017 earnings.

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