Vulcan Materials on a Tightrope

We have maintained a Neutral rating on Vulcan Materials Company (VMC - Analyst Report) following appraisal of first quarter 2012 results.

The company posted a loss of 42 cents per share in the first quarter of 2012, narrower than a loss of 62 cents per share in the same quarter of 2011 (excluding special items) and the Zacks Consensus Estimate of a loss of 44 cents share. Improved top line and gross margins led to the curtailed loss in the quarter.

Total revenue in the quarter rose 10% to $535.9 million driven by meaningful gains in every segment, especially the Aggregates business. Favorable weather conditions and continued market recovery also benefited the top line in the quarter. Revenues were higher than the Zacks Consensus Estimate of $487 million. Consolidated gross margins improved 600 basis points in the quarter due to top-line growth and improved productivity and cost savings.

Overall, we like the company’s strong market standing, steady volume growth and expanded cost savings initiatives. We believe these positives will help the company to reap the benefits once the overall macro economy improves.

We are encouraged by the company’s better-than-forecast results, in particular the impressive performance at the Aggregates segment, which is slowly gaining momentum. The segment is witnessing consistent volume growth driven by improving demand. The segment’s net sales increased $73 million and gross profit was up $53 million in the trailing six months ended March 31, 2012 versus the prior-year comparable period. Management also projects a much improved earnings in this segment in 2012.

In February 2012, the company announced two cost-saving initiatives, a Profit Enhancement Plan (PEP) and planned asset sales, in order to improve earnings and cash flows, pay off debts and thereby strengthen its overall credit profile. Though the company will be hurt by theses initiatives in the near term, the earnings growth profile will improve over the long term on the back of a broader market recovery.

Vulcan serves both the private and public sectors. Public construction projects, such as bridges, dams and roads, are responsible for more than half of Vulcan's businesses. In 2011, publicly funded construction accounted for approximately 55% of total aggregates shipments. Generally public sector spending is much more stable than the private sector because the public construction projects, such as bridges, dams and roads, are less affected by general economic cycles.

The private sector however is a laggard, showing signs of a tepid recovery. Slow private spending in conjunction with rising costs of energy and other raw materials as well as the company’s high debt load keeps us on the sidelines.