Marshall is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The aggregate industry, i.e. crushed rock and stone, has no doubt been hit hard by the slowing economy and weak housing market--but have we finally hit an inflection point?
The industry has had a number of setbacks of late due a wetter-than-expected spring season and the threat of rising interest rates, which have led to concerns surrounding a possible slowdown in the real estate market. But the recent pullbacks could be a great buying opportunity.
In the $15 billion crushed-stone industry, Vulcan Materials(NYSE: VMC)and Martin Marietta Materials(NYSE: MLM) own the market, having 17% and 13% of the market share, respectively. The aggregates industry mines and produces gravel and other related products to be used in construction and infrastructure projects.
Aggregates account for nearly 90% of Martin Marietta's sales. Vulcan has a bit more of a diversified product portfolio; 60% of revenue is from aggregates, while the concrete segment is around 17%, asphalt mix 14% and cement segment 2%.
Last week, Martin posted 2Q EPS of $0.89 compared to $0.92 last year, but well below consensus of $1.14. As mentioned, this was due to unusually wet weather. However, the weak EPS due to wet weather was expected, and the stock is actually up nearly 5% over the past 30 days.
Martin saw volumes fell 1.6% year-over-year, driven by infrastructure. Infrastructure volumes fell 8%, but non-residential construction was up 7% and residential up 4%.
The other thing for Martin was that it cut full-year 2013 volume growth guidance from the 4%-to-6% range to 1% to 3%. However, the reduced guidance was due to the shortfall in the first half of 2013.
Vulcan also came out with 2Q EPS last week. It posted earnings of $0.23 per share, improving nicely from a loss of $0.02 in 1Q and well above the 2Q 2012 EPS loss of $0.13. Revenue was also up 6.4% year-over-year thanks to volume and pricing boosts in its aggregate segment. Vulcan has guided for 2013 volume growth for 1% to 5%.
Vulcan is also focusing on reducing costs and simplifying its structure. In 2012, the company consolidated eight divisions into four regions, helping reduce general and administrative costs by 11% in 2012.
As well, Vulcan is looking to get rid of non-core assets, such as ready-mix concrete, cement operations, and various real estate assets to focus on the aggregates business. All in all, these asset sales are expected to bring in $500 million. As part of this, Vulcan sold a portion of future production for four aggregate quarries in South Carolina to Plum Creek Timber for $75 million last year.
The smaller industry operator is Texas Industries(NYSE: TXI)). The company operates via two segments: cement and aggregate products, and structural steel and specialty bar products. In terms of size, Texas Industries generates some $700 million in revenue annually, compared to Vulcan's $2.6 billion and Martin's $2. billion.
Texas Industries focuses on the Texas and California markets, which have been hit the hardest by the financial and real estate crisis. The company recently announced fiscal 4Q EPS that showed pretax income of $4 million, compared to the loss of $2 million for the same period last year.
For fiscal 4Q, Texas Industries notes that...“the fourth quarter certainly benefited from the continuing recovery of construction activity in our major markets. Shipments of all products reflect double-digit percentage increases compared to a year ago.”
However, the stock is still down over 5% during the past month, as weakness in its end markets persists. Analysts expect the company to grow EPS at an annualized rate that's only 6%.
What's more is that fiscal 2014 EPS is still expected to come in on the negative side, a loss of $0.04 per share for the year. Fiscal 2015 is expected to be positive at $1.64, putting its forward P/E at a relatively high 37 times.
All in all, the major aggregates companies should be big benefactors of the rebound in the economy. This includes strong residential and commercial construction markets. As well, strong spending on infrastructure is another positive.
The best bet on the industry appears to be Martin Marietta, trading with a P/E that's half of Vulcan, and Martin pays a 1.6% dividend yield compared to Vulcan's 0.1%. As well, Texas Industries is still behind its peers in the turnaround and is expected to grow EPS below Vulcan and Martin.
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