Vulcan Materials (VMC) and Martin Marietta Materials (MLM) have been seen as winners recently since Obama's stimulus plan includes infrastructure improvements that could increase demand for the companies' products. Barron's Andrew Bary thinks investors may be overestimating the benefits of increased infrastructure spending and underestimating the extent of the slowdown in residential and commercial construction. Shares of the two stocks could drop by 20% or more if commercial building stays weak while federal spending falls short.
Vulcan and Martin are the country's top two providers of construction aggregates, with market shares of 8% and 6% respectively. Their shares look expensive considering the weak outlook for commercial construction. At $88.79, Martin trades around 20 times projected 2008 profits of $4.37/share, and 20 times 2009 estimated earnings of $4.23. Vulcan trades at 30 times projected 2008 earnings of $1.94, with a similar multiple for projected 2009 profits. Martin could fall into the low 70s over the next year, while Vulcan, recently at $58.67, could fall into the low 40s.
The stimulus plan presented by House Democrats earmarks $30B for bridges and highways, and aggregates companies could see around 10% of that money. But higher federal spending will probably be partly offset by lower appropriations from cash-strapped states.
Bulls argue that a rough 2009 for the companies is outweighed by a strong long-term outlook. The companies have plenty of raw material reserves and domestic demand should continue to grow. Thanks to their combined market share, Vulcan and Martin have also had strong pricing power in recent years.
But to get to a more-optimistic 2010, investors first need to get through a rocky 2009.
- Timna Tanners, a UBS analyst, downgraded Martin to Sell from Neutral, explaining "investor expectations about infrastructure stimulus are too heady and will be disappointed." She holds a Sell rating on Vulcan as well.