rock boy

Cautiously Optimistic About Vulcan Materials

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.