Shares of Vulcan Materials (VMC) jumped up on Monday following the release of its third quarter earnings results.
While the company is making progress on back of the continued housing recovery, which is making a meaningful improvement to the bottom line, I remain cautious. Even when factoring in continued improvements through 2014, I think current earnings are not sufficient to justify the current high valuation.
Third Quarter Results
Vulcan Materials generated third quarter revenues of $813.6 million, up 11.6% on the year before. Revenues came in ahead of consensus estimates of $750.7 million.
Net earnings nearly tripled to $41.4 million, as earnings per share from continuing operations rose from just $0.12 to $0.32 per share. Reported GAAP earnings came in at $0.31 per share, ahead of consensus estimates at $0.26 per share.
CEO and Chairman Don James commented, on the developments over the past quarter, "Our third quarter results reflect the continued recovery of our markets and the benefits of the Company's powerful earnings leverage. A 9 percent increase in aggregates volume helped drive a 20 percent increase in aggregates gross profit."
Looking Into The Results
Revenue growth was being driven by increased shipments, with aggregate shipments increasing by 9% compared to a year earlier. Notably ready-mixed concrete and cement shipments rose by 17 and 10%, respectively as asphalt volumes were up by 4%.
Revenue growth resulted in solid margin expansion as gross margins improved by 210 basis points to 19.5% of total revenues. Despite revenue growth, absolute selling, general & administrative costs were flat, falling by 90 basis points to just 8.1% of total revenues.
All this resulted in a strong EBITDA growth of 27% to $180 million as earnings from continuing operations rose to $41 million.
Note that Vulcan generates roughly two-thirds of total revenues from aggregates and nearly all of its gross profits from that business. Given modest losses at the smaller cement and concrete business, there is still more room to turn things around.
The outlook for volume growth in key markets, as well as strong prices, is expected to continue into the final quarter of the year and into the first half of 2014.
The company continues to see a disproportionately increase in large highway and infrastructural projects going forwards, although timing of such projects remains difficult to predict.
Note that Vulcan Materials did not specific any financial goals for the remainder of the year, or into 2014.
Vulcan Materials ended its third quarter with $245.8 million in cash an equivalents. Total debt stands at $2.52 billion, for a net debt position of close to $2.3 billion.
Revenues for the first nine months of the year came in at $2.09 billion, up 6.7% on the year before. The company reported earnings of $15.3 million compared to a $56.1 million loss last year. At this pace annual revenues of nearly $2.8 billion seem attainable, on which Vulcan could report modest earnings.
Factoring in gains of 8% on Monday, with shares trading around $58 per share, the market values Vulcan at $7.5 billion. This values the firm at an estimated 2.7 times annual revenues.
Vulcan Materials pays a negligible quarterly dividend of $0.01 per share, for a yield of 0.1%.
Some Historical Perspective
Long term holders have seen a full boom and bust cycle over the past decade. Shares rose from $50 in 2004 to highs of $120 by 2007. Over the past five years, shares have mostly traded in a $30-$60 trading range, currently trading near the high end of that range.
Between 2009 and 2012, Vulcan Materials is seen to report stagnating revenues of $2.7-$2.8 billion, after sales fell to lows of $2.5 billion in recent years. The company has been reporting modest losses between $50-$100 million in each of the past three years, expected to return to profitability in 2012.
Shares of Vulcan Materials have seen a bit of a recovery, although profitability remains an issue, especially in relation to the current valuation. Note that third quarter earnings were solid on the back of pricing, volume growth and a lack of restructuring charges.
More positively, cash gross profits rose to $4.83 per ton, the highest level of profitability in over four years. Even better, Vulcan expects earnings leverage to continue in the cycle.
Shares advanced as the US construction sector is improving, but they have also doubled from their lows of 2011 after smaller competitor Martin Marietta Materials (MLM) made an unsolicited offer for its bigger competitor near the end of 2011. On the back of that proposed deal, shares rose by a third to levels around $40 in December of 2011, and shares have risen another 40-50% ever since.
It was at the time, back in December of 2011 when I last took a look at Vulcan Material's prospects. Under the terms of the unfriendly merger proposal, Martin Marietta aimed to create a global leader in construction aggregates. The unfriendly deal got off to a bad start, going hostile immediately. Great synergies of an estimated $200-$250 million could justify the 58% premium for Vulcan's shareholders at the time, yet the deal broke down in the months following, after extensive court rulings.
Yet with the options for deal-making in their back of the mind, and the recovery in the US housing sector, investors have attached a high valuation to Vulcan Materials, too high to my taste.
Even if Vulcan could grow operations to $3 billion in revenues by next year and earnings could come in around $250 million, which is very decent based on historical standards, it is hard to justify a $7.5 billion equity valuation. This even excludes the sizable net debt position of the firm. Even if earnings could total $500 million through good years, which I think is unlikely, the valuation would still be too high to my taste.
I remain on the sidelines with a slightly bearish stance.