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Morningstar | Martin Marietta Shares Trade Lower After 2Q Earnings, but Free Cash Flow Growth Outlook Still Strong. See Updated Analyst Note from 26 Jul 2018

After reporting second-quarter earnings on July 26, Martin Marietta shares have fallen roughly 7% as we write. Based on the market reaction, one would assume a disappointing earnings release and gloomy revised outlook. In our view, however, results were solid, and the outlook for growth remains strong.

During the second quarter, revenue grew 13% to $1.2 billion and gross profit rose 15% to $316 million. Performance could have been even stronger had tightness in rail and truck availability as well as contractor labor shortages not weighed on shipment volumes. We view these headwinds as temporary, as costly construction delays often fall on the contractor, increasing their incentive to pay more to better secure transportation and increase salaries to grow the labor force.

Meanwhile, our outlook is unchanged. Construction pipelines continue to look strong, augmented further by state governments continuing to expand investment to address deteriorating infrastructure. Infrastructure projects tend to be particularly aggregates-intensive, which buoys our positive outlook for continued volume and pricing growth.

Martin Marietta made minor changes to its full-year guidance, slightly raising its midpoint EBITDA target. With the second half of the year typically the bigger contributor, we think the company is within reaching its guidance. As such, we’re maintaining our fair value estimate of $265 per share, as well as Martin Marietta’s narrow-moat rating.

We view the recent share price pullback as an opportunity to acquire Martin Marietta shares at an attractive risk-adjusted discount. Shares traded at nearly $230 as recently as June, and we see no developments that have changed the company’s promising growth from then to now. We continue to forecast rising volumes, supporting continual price increases. Combined with the fixed-cost leverage of aggregates and cement production, we forecast that EBITDA will more than double by 2022 from 2017.

For more details on our outlook for Martin Marietta, please see our report “Martin Marietta Has a Solid Foundation for Massive Profit Growth.”

For more details on our view of U.S. road construction, please see our report “Aggregates Stocks Are Priced for Growth--Do They Deserve It?”