Martin Marietta Materials: Growth Prospects Look Compelling

Summary

• Strong growth in infrastructure and heavy non-residential end-markets, and pricing increases should more than offset headwinds from the slowing residential market.
• Margin should expand, helped by pricing increases and moderating inflation.
• Valuation is below historical levels.

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Investment Thesis

Martin Marietta Materials (NYSE:MLM) stock price has given flattish returns since my previous article in November last year as the company reported mixed results due to inclement weather in Q4. However, looking forward the company is expected to benefit from the strength in infrastructure and the heavy non-residential construction market thanks to investment from federal, state, and local governments under IIJA, Inflation Reduction Act (IRA), and CHIPS Act funding. This coupled with price increases, should more than offset the negative impact of the slowdown in the residential new construction market resulting in good revenue growth. The company’s margin should also expand thanks to price increases and moderating inflation. MLM’s stock is currently trading below its historical levels and given its favorable long-term prospects, I have a buy rating on this stock.

Revenue Outlook

The company posted good growth in FY22 driven by volume as well as pricing. However, Q4 was negatively impacted by inclement weather in a number of Martin Marietta’s markets.

MLM Revenues (Company data, GS Analytics Research)

Looking forward, the company is expected to benefit from healthy backlog levels along with strong demand in infrastructure and heavy commercial end-markets. Additionally, the company should benefit from the carryover impact of price increases in the last year as well as price increases this year.

MLM Aggregate Shipment by End-Market (Company Data)

The company's business should benefit from an expected rise in construction activity in the coming years, supported by enhanced levels of federal, state, and local infrastructure investment. This investment is expected to yield multi-year demand for products across infrastructure and heavy non-residential construction. In the Infrastructure sector, the value of state and local government highways, bridges, and tunnel contracts grew 24% Y/Y to a record $102 billion in 2022 thanks to Infrastructure Investment and Jobs Act (IIJA). The state Department of Transportations (DOTs) also remained robustly funded and this coupled with the deployment of IIJA funds in the coming years should result in strong demand for the company's products.

The heavy non-residential sector, which includes large-scale industrial projects led by energy, onshore manufacturing, and data centers, should also benefit from investments from the Inflation Reduction Act (IRA) and CHIPS Act. These investments should further support and accelerate post-pandemic secular growth trends, including restructured manufacturing and energy supply chains, and an increase in onshore manufacturing.

New residential construction is expected to decline this year given where the interest rates are. However, the interest rate cycle is poised to reverse and many analysts are expecting the federal reserve to start cutting rates sometime in the back half of this year. So, this market is likely to return to growth as well by the next year. The long-term fundamentals of this market are also good as new residential construction should benefit from the significant housing deficit due to over a decade of underbuilding, particularly in the sunbelt markets. This deficit is expected to result in increased demand for the company's products in the coming years.

I am expecting flat to slightly positive total volumes for MLM as demand slowdown from residential end markets should be more than offset by strength in infrastructure and heavy commercial. From next year volume growth should accelerate as the residential market makes a recovery as well.

The company should also benefit from price increases last year as well as this year. Management has guided for aggregate pricing to be up 13% to 15% Y/Y. According to them, the price increase which they implemented in January is getting well received by the customers.

So, I am expecting good revenue growth this year as well as next year. In addition to good organic growth prospects, the company should also benefit from M&As. To expand the existing portfolio of quarries and plants further and gain share, the company is focusing on strategic bolt-on acquisitions and prioritizing upstream acquisitions, which include active aggregates quarries and plants. The company’s balance sheet is strong and it has improved its net debt-to-EBITDA ratio to 2.5x by year-end 2022 from 3.2x in FY21. I believe this improved ratio should support the company's strategic acquisitions to accelerate revenue growth in the coming years.

Margin Outlook

While the company did a good job in terms of raising prices, its adjusted EBITDA margin declined 220 bps in FY22 due to inflationary pressures, especially freight and diesel costs.

MLM Adjusted EBITDA margin (Company data, GS Analytics Research)

Looking ahead, management has guided for aggregates pricing growth of 13% to 15% Y/Y in FY23, and based on this pricing assumption and where diesel prices were at the time of the last earnings call they guided for margin expansion in FY23. If we look at diesel prices, they have further corrected since the company’s previous earnings call. This should make it easier for the company to achieve its guidance of margin expansion this year. In the long term, the company’s “value over volume” commercial strategy should lead to further margin expansion.

Valuation and Conclusion

The company's stock is currently trading at a forward P/E of 24.68x based on FY23 consensus EPS estimates of $14.71 and 21.35x based on FY24 consensus EPS estimates of $17.01, which is lower than its 5-year forward P/E of 25.72x. The company's strong leading position in the majority of its geographical markets, favorable secular growth trends, and investment in strategic bolt-on acquisitions should support revenue growth and market share gain in the coming years. Additionally, margins are expected to benefit from price increases, moderating inflation, and the company’s value-over-volume strategy. If we look at the current sell-side consensus estimates, analysts are expecting good EPS growth over the next few years.

MLM Consensus EPS Estimates (Seeking Alpha)

Considering the company's good long-term prospects, I have a buy rating on MLM stock.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within 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.

This article is written by Vedang S.

Comments

[PT Larry]

Thanks for the article.

[GS Analytics]

@PT Larry thanks for reading it😊

[PT Larry]

@GS Analytics It looks a bit early for MLM, yet am showing a small gain on the investment. There’s not much infrastructure spending noise. The country will need plenty after decades of neglect. I also expect the spending will go on for several years.