Cautiously Optimistic About Vulcan Materials

Yes, we recognize that we may be crazy to take a positive stance on Vulcan Materials Co (VMC) as we did several weeks back. Vulcan announced a few days ago that they are cutting 38 jobs as they tighten the belt through this continued economic downturn. Then, yesterday, Vulcan had a heck of a trading day with a $7.38 increase per share or roughly a jump of +18.4%. Not a bad trading day, and it could demonstrate in some ways how the new administration’s plan in the White House to stimulate the economy could benefit a firm like Vulcan.

Vulcan is a construction material supply company. Crushed stone, sand, gravel and similar materials are all the expertise of Vulcan, and the projects they produce are vital to any residential or commercial development. Given the continued correction in housing and construction in general, it is possible that the downturn Vulcan has experienced since its peak in July of 2007 will continue. Their net income for the third quarter of this year was only $59.1 million, compared with $135.4 million for the same period last year.

Tom Carroll, the director of business development and external affairs at Vulcan put it this way, saying, “When you see a downturn in those sectors [housing, etc], it obviously ends up reflecting on your business.”

We don’t disagree with Tom, but we do think that perhaps the message beginning to permeate through the market from the new Obama administration could signal a turn in Vulcan’s prospects. Just yesterday, President-elect Obama outlined an aggressive stimulus plan to create jobs and stimulate the economy. He very quickly outlined a list of items that he wants to enact including the creation of 2.5 million jobs, with spending specifically on roads, bridges, schools, and clean energy programs. It’s that last part that could really open the door for Vulcan Materials. As an active materials supplier in more than 20 states, this company has the expansive resources and product set to really benefit as spending on infrastructure grows.

Vulcan Materials currently receives a rating of Greatly Undervalued from Ockham. We base that on our historical sales, cash, and dividend models for Vulcan. If we just focus on the Cash Earnings analysis we can begin to understand that for VMC, the current level of Cash Earnings compared to its historical levels helps identify where VMC is in relation to what the investing community was willing to pay for this level of Cash Earnings in the past. Currently, Vulcan’s Price to Cash Earnings ratio is 5.35. That is roughly 51% below where the average of the Price to Cash Earnings range would be for Vulcan over the last decade.

Now we’re not saying that a decline in the stock price wasn’t (or isn’t) justified, but if you look at our price chart and ratings history, we were pretty negative on VMC when it was far above these levels. So we’re certainly not illogical about Vulcan, as many of our investment banking research brethren have been in the past.

Comments

[jepittman:]

I have followed Vulcan from a distance for many years since I live within 250 miles of its Birmingham, Alabama headquarters. IMO they run a good, tight, honest ship (which is more and more important these days) and is very worthy of investment consideration. Thanks for the tip.

2008 Nov 25 05:53 PM

[rock boy:]

There are two big problems with VMC. The first is that they did an incredibly stupid acquisition of Florida Rock paying top dollar as the company was in the midst of a massive downturn in its core Florida markets (which is of course compounded by the declines in VMCs core CA/GA/NC markets). Second, as industry volumes are now down 15-20% this year and probably down mid teens next year (even with the stimulus which is really about a 5 year spend) I think the industry is going to have a pricing problem. VMC (and MLM) worked well despite the downturn in housing because they were able to increase prices 10-15% per year. This year that slowed to mid single digits and was in fact helped by the fact that diesel prices were up significantly for the year (everyone had to maintain price integrity to cover higher fuel costs). With diesel down again (which will be a tailwind for next year), I'd expect pricing to come down significantly. MLM said last week that they expect price to be up ~4% in 2009 after being up ~7% in 2008. That is probably too optimistic.

The stimulus will be a positive but I'm not sure how much it will really help the industry. First, states are slashing their road budgets across the board. UT and NC in the past week announced significant cuts which haven't been baked into expectations. As a result, the stimulus will most likely only fill in these state spending holes. Second, I've been following this industry long enough that stimulus never seems to actually show up. A few years ago CA passed the huge infrastructure bond initiative - 3 years later those dollars haven't made a dent in CA demand. Third, even if the stimulus is additive, the money they are talking about is a 5 year budget amount so the incremental benefit will be much less than expected. UBS had a note this morning that said that to justify the moves in the stocks over the last 3 weeks the stimulus spend would need to be $100 bn in 2009 alone which is highly unlikely.

2008 Nov 26 11:15 AM

[cubanstockp...:]

Rockboy has it right. The same conclusion I am using to short RTP and VMC is the difficulty in digesting a bull market purchase at the peak.
When these companies make these purchases is only after they make a large amount of money and come up with fantastical projections, or else they wouldn't buy like they did.

Lets add one last point, all states and counties are teetering on Bankruptcy.

2008 Nov 26 01:05 PM

[toofast:]

Although Rockboy has valid pionts there is a good bit of hindsight in his post.
When the anouncement for the FRI purchase came, the down turn was around the corner and of unknown value. This deal was struck in Jan.
FRI had already done a pre buy to avoid the new emission trucks.
There was litigation ongoing regarding the limiting of raw materials from the pits in south Florida. With VMC's raw material quaries in the across the gulf in Mexico, it will be a great value to VMI / FRI.
VMC had already purchased a ship to move materials to FL.
So it looked very good.
And don't forget, right or wrong , Wall Street thought that this joining of the two companies was genius.
FRI and VMI were flush with cash and being stared down by Cemex.
This was in part, a move to protect themselves.
No one, let me make certain folks understand, NO ONE wants to end up under Cemex.
I agree that the stimulus is not going to help much, and the failure of the California projects to come on line really hurt.

I am inclined to get out and wait this thing out.

2008 Nov 27 07:52 PM

[William Kab...:]

One of the biggest issues VMC has staring at them is their dividend coverage ratio. They've been paying $1.96 and analysts expect earnings of only $1.90 for '08 and $1.96 for '09 [this will be reduced as the year progresses]. A well run business doesn't payout 100% of earnings AND debt covenants don't allow that either. In bad times you conserve cash, especially when you have the debt load Vulcan is carrying from the Fl Rock deal.If it doesn't happen this quarter, they will cut the dividend in the 1st quarter as there will not be enough federal stimulus help to offset housing, commercial, and shrinking governmental road building. 12XCF is too rich for a company with declining earnings and dividend.

Jan 08 04:35 PM