Earnings Preview: Vulcan Materials

Vulcan Materials Company ( ( VMC - Analyst Report ) ) announced that it would release its results for the first quarter of 2011 after the market closes on May 4, 2011. Alabama-based Vulcan Materials realized a loss of 36 cents per share in the fourth quarter from continuing operations, deteriorating significantly from the Zacks Consensus Estimate of a loss of 19 cents per share.

In the upcoming quarter, the Zacks Consensus Estimate for Vulcan Materials is pegged at a loss of 49 cents per share, reflecting an annualized decline of 39%. The upside potential of the estimate, essentially a proxy for future earnings surprises, is 22.45%.

With respect to earnings surprises, the company negatively outdid the Zacks Consensus Estimate in the trailing four quarters. This is reflected in the average earnings surprise of 63.01%, with substantial negative surprises in each of the last three quarters involved.

Fourth Quarter Review

Vulcan Materials’ net loss widened to $46 million or $0.36 per share in the fourth quarter of 2010 from $12.6 million or $0.10 per share a year ago. The loss per share for the quarter far exceeded the Zacks Consensus Estimate of a loss of $0.17 per share.

Total revenue dropped marginally to $586.2 million from $590 million in the fourth quarter of 2009. The decline was attributable to a decrease in freight-adjusted selling price along with a fall in shipments in North Carolina, Georgia and Florida, despite a stronger demand from public infrastructure projects in Texas, Virginia and South Carolina regions.

Net sales from the Aggregates segment were $362.6 million, down 2% from $369.1 million. Demand for aggregates remained almost stable but freight-adjusted unit selling price went down to $9.95 from $10.39 in the prior year. Consequently, segment earnings for aggregates decreased to $58 million from $70 million during the prior-year quarter.

Net sales in the Concrete segment slid slightly to $90.1 million from $90.7 million in the previous year, due to lower average selling prices, offset partly by higher shipments and lower unit cost of sales. Segment loss was $13 million versus $15 million last year.

The Asphalt Mix segment reported a marginal decline in net sales to $87.6 million from $87.7 million in the fourth quarter of 2009. The segment was favorably impacted by a 2% rise in selling prices for asphalt mix, more than offset by a 14% increase in liquid asphalt cost and a 4% decrease in asphalt volumes. Segment earnings in asphalt were $8 million compared with $10 million in the prior year's quarter.

Revenues in the Cement segment improved 18% to $19 million from $16.1 million a year-earlier due to a 43% increase in shipments, offset partly by a 22% fall in average selling price. Segment loss in the quarter was $1 million led by lower selling prices.

Vulcan Materials’ cash and cash equivalents improved to $48.09 million as of December 31, 2010 from $22.3 million at the end of the prior-year period. However, long-term debt rose to $2.43 billion as of the above date from $2.12 billion a year ago. Net cash generated by operating activities decreased to $202.7 million in 2010 from $453 million in 2009.

Vulcan is optimistic about 2011. The company expects improvements in each of its operating segments during the year. It forecasted a stable demand outlook along with a 1%-3% hike in the price of aggregates. Further, the company’s selling, general and administrative expenses in 2011 are expected to be $305 million and capital spending to be $125 million for the year.

Estimate Revisions Trend

The first quarter 2011 estimate remained unchanged at a loss of 49 cents per share. The evidence of sluggish growth in the U.S. construction industry keeps the analysts cautious about the stock.

Agreement of Estimate Revisions

No upward or downward revision of estimates has been made in the last 30 days by any of the 13 analysts covering the stock for the first quarter of 2011. The analysts seem to be extra cautious on the stock given the macro economic conditions in the U.S. and the growing competition in the industry.

Magnitude of Estimate Revisions

Following the fourth quarter earnings release in February, the quarterly earnings per share were projected to be a loss of 46 cents per share. However, in the last 60 days, the estimate had been revised downward to a loss of 49 cents per share. Again, estimate dropped by one penny to a loss of 50 cents per share in the last 30 days. However, this recovered to a loss of 49 cents in the last 7 days.

Our Take

The construction industry in the U.S. (both residential and industrial) will either witness a lack of growth or sluggish growth during 2011, thereby leaving little scope for the building materials industry to make improvements.

Secondly, increasing competition from other material suppliers namely Cemex ( ( CX - Snapshot Report ) ) , Lafarge ( ( LFRGY ) ) and Martin Marietta Materials Inc. ( ( MLM - Snapshot Report ) ) may pose additional problems for the company by capturing a portion of its potential markets.

However, being the nation’s largest producer of construction aggregates and a leading producer of other construction materials, Vulcan Materials is expected to overcome the hurdles and the possible business threats to retain its market position. A diversified customer base and increased demand from public infrastructure projects in a number of crucial markets are the positive signs for Vulcan.

We give Vulcan shares a Neutral recommendation in the long term.