Morningstar | Having Fallen 40% Year to Date, Vulcan Materials Surges After 3Q Results Show Recovery Still Ongoing
Vulcan shares had dropped nearly 40% year to date leading into the company's third-quarter earnings release. However, we’ve argued that Vulcan’s steep share price decline has been unwarranted. On Oct. 30, the company reported third-quarter earnings that reflected favorable conditions. With a slowdown of U.S. construction activity nowhere in sight, shares have risen more than 17% as we write.On a same-store basis, Vulcan saw its third-quarter daily shipping rate rise 6% and prices rise 3% (after excluding mix impacts). Furthermore, despite the sharp 28% year-over-year spike in diesel prices, the company’s freight-adjusted unit cost of sales actually declined 2% from the prior-year quarter. With volume and prices rising and costs falling, gross profit per ton rose 8% to $5.45 per ton. Incremental gross margin per ton was still above 60%.
To us, these results reflect a market in ongoing recovery, not one that has already peaked. Furthermore, management highlighted still-growing public sector demand. This is in line with our view that improved government financing in Vulcan’s footprint would finally address a backlog of much-needed infrastructure projects.
Due to the weather impacts, the company reduced its full-year adjusted EBITDA guidance to $1.125 billion to $1.135 billion, down from $1.15 billion to $1.25 billion. We anticipated a bigger impact from weather in our update earlier in October. We didn’t expect the company would be able to offset the spike in diesel prices with lower overall costs. As a result, we’ve slightly raised our 2018 adjusted EBITDA forecast to just above $1.1 billion, an increase of roughly $50 million. Our long-term forecast remains intact, as we expect adjusted EBITDA to double by 2022, fueled by public project growth. We’ve maintained narrow-moat Vulcan’s fair value estimate of $135 per share. With shares still trading under $100, we think the market continues to underestimate the degree to which Vulcan will be able to grow profits.
For our state-by-state road spending outlook, please see our report, "Aggregates Stocks Are Priced for Growth--Do They Deserve It?"
Vulcan Materials is a supplier of construction aggregates and a producer of asphalt mix and ready-mixed concrete. The company has four segments: Aggregates, which produces and sells aggregates (crushed stone, sand and gravel, sand, and other aggregates) and related products and services; Asphalt, which produces and sells asphalt mix in Alabama, Arizona, California, New Mexico, Tennessee and Texas, and includes asphalt construction paving in Alabama, Tennessee and Texas; Concrete, which produces and sells ready-mixed concrete; and Calcium, which consists of a Florida facility that mines, produces and sells calcium products.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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