On Jan 28, we maintained a Neutral recommendation on Vulcan Materials Company ( VMC - Analyst Report ) despite poor third quarter results due to improving housing fundamentals.

Why the Neutral Recommendation?

Vulcan’s earnings of 14 cents per share in the third quarter of 2012 lagged the Zacks Consensus Estimate by 18% due to a decline in revenues. Revenues declined 4.2% to $728.9 million and also lagged the Zacks Consensus Estimate by a wide margin.

Revenues were hurt largely due to volume declines in aggregates as weaker public sector activity was partially offset by improved private construction work. Management also lowered its 2012 adjusted EBITDA and aggregates volume guidance.

However, Vulcan is doing a good job of aggressively controlling costs and also increasing pricing. As a result of all the cost reduction initiatives, Adjusted EBITDA (excluding real estate gains) has increased 25% in the nine months of 2012 despite a 1% decline in volumes. Moreover, Vulcan has solid fundamentals with its geographic diversity and high barriers to entry for the aggregates industry.

Though sluggish of late, management is expecting solid growth in aggregates demand in 2013 as private construction demand is expected to continue rising. As the new home construction market recovers, the demand for the company’s products is expected to go up.

The company is seeing improvement in key markets like Fla., Texas and Ariz. as private construction activity, specifically residential housing, starts and contract awards for nonresidential buildings, continue to improve.

The demand for highway construction is also expected to grow modestly with increased funding certainty from the new highway bill. A new multi-year highway bill was passed by the Congress in Jul 2012. The bill is intended to provide the state transport departments with highway funding certainty, thus increasing demand for highway construction.

The federal government has yet to review and approve the bill. Though the passage of the bill did not have any material impact on the third quarter volumes, it is expected to boost demand for highway construction in the long term, which in turn will benefit Vulcan’s volumes. Thus we have a Neutral recommendation on the stock despite poor quarterly results.

Other Stocks to Consider

Vulcan carries a Zacks Rank #3 (Hold). Other stocks in the building materials sector that are worth considering include Eagle Materials Inc. ( EXP - Snapshot Report ) - Zacks Rank #1 (Strong Buy) and Texas Industries Inc. ( TXI - Snapshot Report ) - Zacks Rank #2 (Buy). In the broader housing construction industry, PulteGroup, Inc. ( PHM - Analyst Report ) carries a Zacks Rank #2 (Buy).