Morningstar | Vulcan Shares Surge on Aggregates Strength and Positive Infrastructure Growth Outlook. See Updated Analyst Note from 15 Feb 2019
After dipping below $85 in late October, Vulcan Materials shares have recovered significantly over the last few months as it appears that fears of a construction slowdown have waned. After Vulcan reported fourth-quarter results and provided 2019 guidance on Feb. 14, its shares rose another 7%, reaching $113.We see little evidence of slowing demand, particularly when it comes to infrastructure. Organic aggregates performance was strong across the board in 2018. Volume rose 6% despite some challenging weather conditions, freight-adjusted prices rose 4% excluding mix shift impact, unit cost of sales declined 2% despite higher energy costs, and gross profit per ton rose 8%. Based on management’s 2019 guidance, strong demand should drive another 5%-7% in price growth companywide.
We’ve updated our model for the latest guidance while also lowering our longer-term capital expenditures forecast, which sits closer to our volume forecast. Along with the time value of money impact on our model, we’ve raised our fair value estimate to $135 per share from $125 for narrow-moat Vulcan Materials. The shares look slightly undervalued on a risk-adjusted basis.
Vulcan highlighted the strength in public infrastructure activity, particularly highway construction, in its footprint. It noted that public highway starts grew 12% in 2018 in its footprint, compounding a 14% increase in 2017. During the call, CEO Tom Hill affirmed the growing strength in highway demand, saying, "The many increases in state and local highway funding that we’ve seen across our footprint are now turning into shipments. We are in the very early stages of big growth in highway demand."
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 are securing near-term and improving longer-term road funding. The company’s comments support this view, as we believe aggregates-intensive highway construction will drive significant EBITDA growth in the next few years. For more details on why we think today’s political environment is favorable for improved infrastructure funding, please see the aforementioned report.
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.
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