EUR 850.00 For Business Accounts Only

Morningstar | Vulcan Will Generate Significant Earnings Growth Driven Via Increased Infrastructure Activity

Aggregates producer Vulcan Materials is well positioned to benefit from the ongoing recovery of U.S. construction spending. We forecast strengthening demand growth for the public sector and modest growth for the private sector.Accounting for roughly half of shipments, public-sector demand is generally more stable, and projects, primarily highway construction, are more aggregate-intensive per dollar of spending. At a national level, we expect public infrastructure spending to grow by 6% per year on average. That would mark an acceleration in growth from 3.5% during 2002-16, as historical funding has led to worsening conditions. Federal funding power has weakened as better vehicle mileage and inflation have diminished the buying power of the $0.18 per gallon gasoline tax, unchanged since 1993. The FAST Act, passed in December 2015, provides stability and near-term funding certainty, but doesn't solve the still-weakening gas tax. However, long-term improved federal funding is on the horizon, given bipartisan support.The outlook for road spending differs considerably from state to state. Differences in population growth, road conditions, funding mechanisms, and overall state fiscal health influence spending. Vulcan's largest states by revenue--Texas, California, Virginia, Georgia, and Florida--have significant road spending needs and strong finances to support high growth.Private-sector demand consists of residential and nonresidential construction, including commercial and industrial properties. Nonresidential construction is the most important driver in the category, as spending is more material-intensive per dollar than residential construction. We forecast accelerating nonresidential spending in the near term, after which we expect growth to slow to 4%. That would be lower than the historical average of about 5%-6% annually as we expect many key sectors to make more efficient use of their construction spending. Our residential forecast adds additional growth, as we expect housing starts to reach 1.6 million by 2023.