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On Oct 3, we maintained a Neutral recommendation on Vulcan Materials Company (VMC - Analyst Report) due to mixed second-quarter results. While aggregates volume rebounded in the second quarter after declining in the past four quarters, we await a substantial and consistent improvement before turning more positive on the stock.

Why Retention?

Vulcan announced mixed second-quarter results on Aug 1. Adjusted net earnings of 13 cents per share missed the Zacks Consensus Estimate of 14 cents by 7.14%. The adjusted earnings, however, improved significantly from prior-year quarter loss of 2 cents on the back of solid revenue increase in most of the segments. Total revenue grew 6.4% year over year and also beat the Zacks Consensus Estimate by 4.6% owing to growth in both volumes and pricing. Broad based recovery in private construction activity, particularly residential construction is boosting the demand for Vulcan’s products.

In fact, aggregates volumes grew 2% in the second quarter, rebounding from the decline witnessed in the past four quarters. Aggregates pricing also continues to gain traction. Management expects second-half aggregates volumes to be better than the first half. However, management's outlook for the second-half volumes brings implied full-year 2013 shipments to the lower end of the prior guidance of 1%–5%. Encouragingly, however, faster growth in aggregates volume is expected in 2014 as private construction demand is expected to continue to rise.

Vulcan is now witnessing increasing demand for private construction; specifically residential housing starts and contract awards for non-residential buildings are growing, following steady recovery in the overall housing industry. Though private construction is expected to continue to improve in the second half, uncertainty looms around the public construction market. In public construction market, though the number of large highway and industrial projects are expected to grow with increased funding certainty from the new highway bill, the timing of these projects is difficult for management to predict.

Accordingly, we prefer to wait for further visibility of substantial growth in public sector construction.

Other Stocks to Consider

Vulcan carries a Zacks Rank #4 (Sell). Other stocks in the building materials/home improvement sector that are worth considering are Anhui Conch Cement Co. Ltd. (AHCHY), Holcim Ltd. (HCMLY) and Masco Corporation (MAS - Analyst Report). While AHCHY and HCMLY carry a Zacks Rank #1 (Strong Buy), MAS carries a Zacks Rank #2 (Buy).

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