EUR 850.00 For Business Accounts Only

Morningstar | Vulcan Shares Continue to Surge After Strong Start to 2019, but Rally Leaves Limited Upside

After dipping below $85 per share in late October, Vulcan’s share price has continued to rally. It appears that fears of a construction slowdown have waned, especially after Vulcan’s strong start to 2019. Having reported first-quarter earnings, management maintained 2019 guidance. We continue to see little evidence of slowing demand, particularly as it pertains to infrastructure.

Vulcan's aggregates performance was strong across the board in the first quarter. Organic volume growth was 11%. Despite challenging weather conditions in California, freight-adjusted prices rose 6% excluding mix shift impact, and gross profit per ton rose 25%. During the earnings call, some analysts questioned whether firstquarter results warranted an increase to guidance, but management stressed that weather can be unpredictable and quite impactful in the more important second and third quarters.

As we’ve largely maintained our forecast, our $135 per share fair value estimate and narrow-moat rating are unchanged. Shares have rallied more than 50% since October, leaving limited risk-adjusted upside at this time. Our view hasn’t changed much over the time period, as we already believed the market had underestimated the strength of underlying demand. The market appears to have adopted a view closer to ours, no longer pricing in a slowdown for building materials demand.

Separately, on April 30, Democratic congressional leaders met with President Trump and agreed to aim for a $2 trillion infrastructure package. However, agreeing on the source of funding has always been a challenge, and the meeting did not focus on how to pay for the potential deal. Although we think today’s political environment is favorable for progress, we need to see more details on funding before we're convinced the plan will come to fruition as proposed.

In our December report, "U.S. Infrastructure Spending Outlook Boosted by Midterm Elections," we argued that the FAST Act and improved state and local mechanisms secure near-term funding and will improve longer-term road funding. For more details on why we think today’s political environment is favorable for improved infrastructure funding, please see the aforementioned report.