Martin Marietta: An Infrastructure Play On Sale

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About: Martin Marietta Materials Inc. (MLM)
by: Brad Kenagy

Summary

Shares of Martin Marietta are down over 17% this year.

Martin Marietta is trading at its lowest PE since the financial crisis.

Martin Marietta is expecting record results in 2018, so there is a disconnect between the stock price and the underlying fundamentals.

In this article, I will be covering a popular infrastructure related company that has performed poorly during 2018. Martin Marietta Materials (MLM) supplies aggregates, cement, asphalt, etc for building and construction. Shares of Martin Marietta are down over 17% year to date, however I believe the stock is near a low and a rebound could be right around the corner. There is a disconnect between the stock price and the underlying fundamentals, which is an opportunity for investors. Martin Marietta is attractive because of the strong underlying fundamentals of the business, hurricane repairs and an appealing technical outlook.

The knock on Martin Marietta has always been valuation. Historically the company has traded at a high PE; however the following chart shows the PE ratio is now at levels not seen since 2009. The situation is completely different now compared to 2009, given the record results the company has continued to post.

Zacks

Strong fundamentals

In the last earnings release, Martin Marietta noted that pricing and volumes were up, gross margins were up and the company increased their guidance. Even in the face of all these positives, shares have continued to decline, which has created this opportunity. The following table shows an overview from the earnings release and shows that all metrics showed improvement y/y. In addition, the second table shows in visual form that estimates for 2018 are expected to be a record for revenues, gross profit and EBITDA.

MLM earnings release

MLM Q2 2018 Investor presentation

Martin Marietta has a strong foundation for continued growth because construction spending is still below 2006 levels and should be a driver for future growth. There are always stories about the poor condition of the roads or the staggering amount of money needed to fix the aging infrastructure of the United States. I believe regardless of election results in November that over the next two years, one of the few things that both Republicans and Democrats could actually agree on is increasing infrastructure spending.

MLM Q2 2018 Investor presentation

Hurricane repairs

As the below chart shows, Martin Marietta has a high concentration of facilities in the South, specifically North Carolina, South Carolina and Georgia. With all the flooding that occurred during the recent hurricane, there will be a number of road projects and repairs that will need to be completed to get things moving. Since Martin Marietta has many facilities in the area, I expect they will be one of the first companies to see money that will be flowing into the area for repairs. Getting roads fixed and drivable is one of the key tasks that occur after a natural disaster. Regardless of the impact of the hurricane, North Carolina, Georgia and South Carolina are listed in the investor presentation as being the 3rd, 4th and 6th largest sources of revenue generated for the company.

MLM Q2 2018 Investor presentation

Technical outlook

The technical outlook is appealing for Martin Marietta because the stock is oversold, near a long-term level of support and the MACD and RSI are at oversold levels. The first item to take note of on the chart is the purple line, which is an important level of support around $175. Currently shares of Martin Marietta are only a couple percent above this level and when combined with the oversold conditions and the underlying fundamentals, I believe the $175 will hold. The MACD indicator is at a level not seen since the beginning of 2016 and during the financial crisis. In addition, the RSI is at a low level is well, and as the chart shows, when the RSI has been it these levels over the last 15 years it has been a good buying opportunity.

*Chart scale is weekly

ThinkorSwim

Closing Thoughts

In closing, I believe shares of Martin Marietta are worthy of consideration at these levels because the company is posting strong results, has a long pathway for continued growth, will be one of the first companies to help with hurricane repairs and the technical outlook is appealing. Add in the fact that shares are trading at a PE not seen since the financial crisis along with the potential for a future infrastructure bill, and that makes Martin Marietta worthy of consideration.

Disclaimer

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in MLM over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.