Morningstar | Vulcan’s Costs Rise Sharply in 2Q, but Strong Demand and Price Hikes Will Keep Growth Outlook Intact. See Updated Analyst Note from 31 Jul 2018
Vulcan Materials reported a mixed second quarter, leading shares to fall 3%, as we write. On one hand, the company continued to see solid year-over-year organic growth in addition to contributions from Aggregates USA. Adjusted EBITDA rose 13% to $325 million, as aggregate shipments rose 11% on a same-store basis. Aggregates prices rose 3% over the prior year quarter after adjusting for mix shift. Strong demand continues to support volume growth, which in turn allows the company to increase prices.On the other hand, costs rose sharply during the quarter, as a 30% increase in diesel costs lowered aggregates gross profits $7 million, or 300 basis points in margin. In addition, the asphalt paving business was hurt by a 28% price increase in key input liquid asphalt, making the segment unlikely to hit the high single-digit gross profit growth expected at the start of the year.
Despite this, Vulcan maintained its full-year guidance of earnings from continuing operations of $4.00 to $4.65 per share and adjusted EBITDA of $1.15 billion-$1.25 billion. Given the sharp rise in costs, we think it's unlikely the company will reach these targets, as we now forecast earnings of roughly $3.50 per share and adjusted EBITDA of just below $1.1 billion. We had previously forecast earnings of $4.33 per share and adjusted EBITDA of more than $1.2 billion. However, we've lowered our longer-term adjusted EBITDA forecast by less than 5%. In the long run, we expect Vulcan to pass the majority of its input cost increases on to its customers.
After the changes to our forecast, we've lowered our fair value estimate to $138 per share from $148 for narrow-moat Vulcan. However, shares look undervalued to us. We think the market is overestimating the long-term impact of recent input cost inflation and is underestimating the still-strong demand pipeline of residential, nonresidential, and road construction that will continue to drive volume growth.
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.
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