EUR 850.00 For Business Accounts Only

Morningstar | Weather Hampered Martin Marietta’s 2018, but Increased Infrastructure Funding Will Drive Growth. See Updated Analyst Note from 12 Feb 2019

Weather and constraints elsewhere in the construction market muted what would have been a stellar 2018 for Martin Marietta, constraining construction activity and material deliveries during the fourth quarter. This led to organic aggregates shipments to be roughly flat for the year, although strong underlying demand supported a 3% year-over-year average price increase and backlog growth.

Wet weather compounded the headwind from extended maintenance, leading to an underwhelming 1% increase in cement shipments. Nevertheless, pricing still increased by 3%, and the company has already announced a robust price increase slated for April 1 in one of its key markets. We continue to believe the U.S. cement market will be under-supplied over the next few years, supporting further price increases.

We’ve reduced our forecast for management’s 2019 guidance but expect nearly 15% EBITDA growth assuming minimal adverse weather and including full-year contributions from the Bluegrass acquisition. The change offsets the time value of money impact on our model, leading us to maintain Martin Marietta’s $240 per share fair value estimate and narrow-moat rating. Shares continue to look undervalued, as we believe the market continues to fear slower growth ahead. However, this overlooks an improving outlook for infrastructure activity.

During the call, CEO Ward Nye discussed the company's optimism for better infrastructure funding. First, he pointed to infrastructure’s abnormally low end-market share of 39% in 2018. In comparison, aggregates accounted for 46% of aggregates shipments in the last 10 years. Put another way, the infrastructure market’s consumption of aggregates remains well below historical levels, despite growth in the economy and deteriorating conditions.

Second, like we concluded in our December Report, “U.S. Infrastructure Spending Outlook Boosted by Midterm Elections,” Nye highlighted the FAST Act and improved state mechanisms as securing near-term and improving longer-term road funding. The company’s guidance supports this view, as it expects aggregates shipment growth for infrastructure in the high single digits compared with nonresidential growth of mid- to high single digits and residential growth of midsingle digits.

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 why we think today’s political environment is favorable for improved infrastructure funding, please see our report, “U.S. Infrastructure Spending Outlook Boosted by Midterm Elections.”