Martin Marietta Materials: Medium-Term Compounding Potential Intact
Summary
- Building on the success of prior iterations, Martin Marietta unveiled its 2025 SOAR plan at its latest investor day event.
- With the company positioned to benefit from a construction-led upcycle and M&A-led growth, I expect upside surprises ahead.
- Capacity expansion also remains on track and should prove accretive considering the favorable economics.
- At the current relative discount to VMC, shares are reasonably priced.
Martin Marietta's (NYSE:MLM) latest investor day has changed my mind on the shares. As highlighted by management, there is a clear path to further value creation ahead through the continuation of its SOAR strategy (initially launched in 2010). Of note, the focus on expanding into growth markets through aggregates-led platform acquisitions and other bolt-ons, along with capacity expansion, entails plenty of earnings growth in the upcoming years. With valuations also reasonable relative to the growth potential and its peers, Martin Marietta appears to be positioned for relative outperformance.
Unveiling SOAR 2025
Following a very strong set of fiscal 2020 results and a demonstrated track record of success in recent years, Martin Marietta looks set for more of the same with its fiscal 2025 SOAR plan. Recall that the two previous SOARs have resulted in the market cap doubling in each five-year period, with the top line increasing c. 2.7x and EBITDA by c. 3.7x since the program started in fiscal 2010. The key difference this time around was the lack of formal longer-term financial goals, although with management informally targeting another doubling of the company's market cap by end-2025, there is no less ambition here.
Source: Martin Marietta Investor Day 2021 Presentation Slides
Nonetheless, the investor day event did focus on other key aspects like pricing, margin growth, and the focus on M&A to add to the cash generation. The pricing normalization opportunity, for instance, is massive - a convergence in aggregates pricing toward the company average and Southeast region pricing would result in a revenue expansion potential of c. $140 million and c. $700 million, respectively. Somewhat disappointingly, however, the discussion around margins was mainly on prior achievements, although management's new focus on the gross cash profit per ton metric was an interesting change from its usual quarterly reporting of gross margins.
Source: Martin Marietta Investor Day 2021 Presentation Slides
Capitalizing on the Construction-Led Upcycle
Encouragingly, the company remains focused on value over volumes – management is explicitly targeting 4+% pricing growth through the cycle and input cost inflation at c. 2.5% (in-line with the broader economy). I believe this could prove conservative, however, with management not only projecting peer-leading unit margin improvement but also broad-based demand growth across key end-markets such as infrastructure, residential, and non-residential over the upcoming years. With leading indicators such as single-family housing starts and total construction square footage all on the rise, and shipments still well below the prior peak (c. 26% in fiscal 2020), there is plenty of room for growth.
Source: Martin Marietta Investor Day 2021 Presentation Slides
Additional tailwinds include a higher proportion of starts from new communities, which tend to be 2-3x more aggregates-intensive, along with a shift toward heavy non-residential (estimated at 7-9x higher aggregates intensity). This will likely be coupled with a strong (but lagged) recovery in residential, retail, and light commercial projects. Nonetheless, the fact that management sees the next upcycle as construction-led is a key positive for the growth runway, and with an upcoming infrastructure bill as well, I think Martin Marietta could surprise to the upside on its growth targets.
Capital Allocation Focus Remains on M&A
Unsurprisingly, the capital allocation framework is largely unchanged, with M&A still the top priority. The rationale makes a lot of sense – acquisitions offer day-one cash flows and synergy realization potential while also allowing the company to minimize regulatory risk in new markets. Considering management's strong track record of M&A integration as well, I would view any upcoming bolt-on and platform acquisition opportunities ahead as positives. For now, management is focused on aggregates-led deals (bolt-ons and platform expansion) that provide market-leading positions in the "megaregions" outlined in the graphic below.
Source: Martin Marietta Investor Day 2021 Presentation Slides
I like the opportunity here - the industry is ripe for consolidation, with c. 3,600 closely held businesses potentially available for purchase. Furthermore, the company has also seen success with this approach with the Colorado/River asset swap, which helped build its leading position in Colorado and enabled above-average pricing growth over the past few years. Finally, I would note that the company has plenty of balance sheet flexibility (even assuming no divestitures), with an additional c. $2.5-3.0 billion of capacity available and its current leverage ratio below the targeted 2.0-2.5x range.
Source: Martin Marietta Investor Day 2021 Presentation Slides
Capacity Expansion Plans on Track
While capex intensity will be targeted at c. 9% (implying c. 10% spend per ton lower than peers according to management estimates), capacity expansion remains on schedule. Notably, Martin Marietta will invest in a new crushing line which adds c. 3.5 million tons (implying a 30+% capacity expansion) at its Bridgeport/Chico location in Texas. This adds to the 0.5-million-ton capacity to be added at its Midlothian plant as well, with the planned upgrading of its finishing mill driving a c. 10% capacity addition by next year.
Source: Martin Marietta Investor Day 2021 Presentation Slides
I think the key will be the Texas buildout – with the demand outlook robust, the company has plenty of share gain opportunities here amid a favorable pricing backdrop. As the upcoming expansion is also set to come in at c. 50% of the cost/ton of a new plant, the economics appear highly favorable. With the project already permitted and the often-discussed expansion potential finally validated at the investor day, I think the fiscal 2025 targets, when released, could surprise significantly to the upside.
Final Take
Overall, Martin Marietta's investor day event confirmed much of the bull case, with its footprint likely to benefit from tailwinds across residential, non-residential, and infrastructure trends going forward. Furthermore, its leading market share in attractive markets means the company is likely to sustain above-average pricing growth as well. Near term, the company is also benefiting from a faster-than-expected recovery and an inflection in single-family starts, while the prospect of a large deal could also drive a re-rating ahead. With the setup looking good into fiscal 2022, I am bullish on the shares, with the current c. 16x EV/EBITDA multiple offering value relative to closest peer Vulcan (VMC).
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