Vulcan: Mountains of Stone
01/04/2017 8:00 am EST
Our latest recommendation has been putting the road beneath your feet for over a century; the nation’s largest producer of crushed stone, sand and gravel has been in business since its inception as Birmingham Slag in 1909, notes Linda McDonough, editor of Profit Catalyst Alert.
Vulcan Materials (VMC) got its early success from a burst of government funding in 1933 for the Tennessee Valley Authority projects, which built dams and roads in a region where deforestation had led to flooding.
Another catalyst for a burst of business is right around the corner. Funding from the FAST Act (Fixing America’s Surface Transportation), which Congress approved in late 2015, has begun to flow into the market and will add another layer of demand for Vulcan’s construction materials.
An additional $201 billion in funding designated for statewide transportation projects was passed via ballot measures in 23 states in November.
Vulcan management believes the country is in the early days of mid-cycle building growth. At the trough of the cycle (second quarter of 2013), Vulcan shipped 140 million tons of aggregates (sand, gravel and stone) from its facilities.
That annualized number is now around 185 million tons. The peak number was 305 million tons, 65% above today’s levels. A conservative annualized number would be 255 million tons.
Crushed stone, sand and gravel, known in the industry as aggregates, make up 83% of Vulcan’s revenue and 87% of profits. Volume and pricing for aggregates has been steadily moving up since hitting a low in 2013.
Pricing, which has been steady throughout the cycle, increased 7% in 2015 and was up 7.5% during the third quarter. Because sand, gravel and stone are heavy, shipments tend to be local, insulating manufacturers from nationwide price wars.
The stock is not without risks. Another volume decline is expected for the first quarter, but a longer period of slowing shipments would indicate something worse than a short-term logjam of projects from poor weather.
In the meantime, the spigot of public funding has just begun to open, and Vulcan is ready and waiting with mountains of stone. My $165 target is based on 30 times 2018 earnings and offers 30% upside to recent prices.