Southeastern Asset Management Stonewalls Vulcan Materials

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In late January, Southeastern Asset Management announced that it has further downsized its Vulcan Materials (NYSE: VMC) position by 16%. Southeastern now owns 8.26 million shares, or 6.4%, of Vulcan. This is a big change from Southeastern's third quarter investing thesis, where the firm had Vulcan as its fifteenth largest 13F holding and owned over 12.1 million shares (read more about it here). It appears that Southeastern is betting against Vulcan based on both industry concerns and over-valuation. 

Mason Hawkins founded Southeastern in 1975, and the firm manages some $32 billion. Southeastern has its biggest bet on Chesapeake Energy, which accounts for over 7.2% of its portfolio. The firm, along with billionaire Carl Icahn, is making solid progress with the oil and gas companySoutheastern also has big bets on industry bellwethers FedEx, Cemex, and top Vulcan competitor Martin Marietta (NYSE: MLM) (check out all of Southeastern's top picks).

Aggregates are the flagship business of both Vulcan and Martin Marietta, and aggregates demand has remained weak for some time and should remain so for the interim. Infrastructure spending should also remain weak on declining stimulus spending and public sector demand suffering due to softness in highway construction. Over the course of the economic downturn, Vulcan managed to cut admin costs, with plans to cut another $100 million over the next three years, but it will not be enough to hedge the demand decline. Other fundamental issues include rising costs of diesel fuel.

Vulcan expects aggregates shipments to fall about 1% this year, while prices should increase 1%-3%. Meanwhile, Martin Marietta saw aggregates volume up 1% to 2% in 2012 and consensus expects sales growth of 10%-12% in 2013.

Other notable aggregates and heavy materials competitors include Texas Industries (NYSE: TXI)  which managed to post an EPS loss of $0.40 last quarter, compared to the expected $0.34 loss. The company operates on a smaller scale than its major peers, being a supplier of heavy construction materials in the southwestern U.S. Anhui Conch Cement is one of the leading cement providers in China and Cemex is one of the largest cement companies in the world, operating on four continents. 

Valuation. Despite the industry concerns, Vulcan is on the expensive side nonetheless. On a price to book basis, Vulcan is trading with a multiple of 2.0, the top end of its five-year range. Vulcan's five-year price to book range is 0.9 to 2.2. Comparing other multiples, Vulcan is above its notable competitors:

<table> <tbody> <tr> <td colspan="1" rowspan="1"> </td> <td colspan="1" rowspan="1"><strong>Vulcan</strong></td> <td colspan="1" rowspan="1"><strong>Martin Marietta</strong></td> <td colspan="1" rowspan="1"><strong>Texas Industries</strong></td> <td colspan="1" rowspan="1"><strong><span><span>Cemex</span></span></strong></td> </tr> <tr> <td colspan="1" rowspan="1">Price to Sales</td> <td colspan="1" rowspan="1">2.86</td> <td colspan="1" rowspan="1">2.44</td> <td colspan="1" rowspan="1">2.47</td> <td colspan="1" rowspan="1">0.77</td> </tr> <tr> <td colspan="1" rowspan="1">Price to Operating Cash Flow</td> <td colspan="1" rowspan="1">28.61</td> <td colspan="1" rowspan="1">21.92</td> <td colspan="1" rowspan="1">21.96</td> <td colspan="1" rowspan="1">29.42</td> </tr> </tbody> </table>

The under-performance doesn't stop there for Vulcan, the company has an operating margin and return on assets well below the second largest U.S. aggregates producer Martin Marietta:

<table> <tbody> <tr> <td colspan="1" rowspan="1"> </td> <td colspan="1" rowspan="1"><strong>Vulcan</strong></td> <td colspan="1" rowspan="1"><strong>Martin Marietta</strong></td> </tr> <tr> <td colspan="1" rowspan="1"><span>Operating Margin (<span>TTM</span>)</span></td> <td colspan="1" rowspan="1">2.53%</td> <td colspan="1" rowspan="1">10.41%</td> </tr> <tr> <td colspan="1" rowspan="1"><span>Return on Assets (<span>TTM</span>)</span></td> <td colspan="1" rowspan="1">-1.03%</td> <td colspan="1" rowspan="1">2.33%</td> </tr> </tbody> </table>

The two major aggregates companies, Vulcan and Martin Marietta, have been going back-and-forth with merger discussions over the past couple years, beginning in April 2010. Martin Marietta's initial hostile offer was 0.5 of Martin shares per Vulcan share, valuing Vulcan’s equity at $4.8 billion. Worth noting, is the 0.5 ratio would be 13% below Vulcan's current share price. 

Other notable fund managers that have been dumping Vulcan shares include billionaires Jim Simons and Steve Cohen. Jim Simons sold off all his shares during the third quarter and Steve Cohen sold off 79% of his shares (check out which hedge funds own Vulcan).

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