Vulcan on a Tightrope

On Apr 15, we maintained a Neutral recommendation on Vulcan Materials Company ( VMC - Analyst Report ) due to steady recovery in its end markets, despite weak fourth quarter results.

Why the Neutral Recommendation?

Vulcan’s fourth quarter 2012 results announced on Feb 14, 2013 were quite weak. Vulcan posted adjusted loss of 30 cents per share in the fourth quarter of 2012, much wider than the Zacks Consensus Estimate of a loss of 11 cents as well as the last quarter’s adjusted loss of 11 cents. Top line declined 1% due to volume declines in the flagship Aggregates segment.

Persistent volume weakness remains a point of concern. Vulcan’s overall results in 2012 were significantly hurt due to 1% decline in aggregates shipments in 2012.

Following the weak fourth-quarter results, estimates mostly moved downwards for 2013 and 2014. The Zacks Consensus Estimate declined almost 39% to 11 cents while that for 2014 reduced 2.6% to 76 cents over the last 60 days.

However, Vulcan is now witnessing a growing demand for private constructions, specifically residential housing starts and contract awards for non-residential buildings, following steady recovery in the overall housing industry. Management is expecting solid growth in aggregates demand and volume in 2013 as private construction demand is expected to continue to rise.

Overall, Vulcan expects earnings growth to improve in 2013 on the back of increased demand for both the aggregates and non-aggregates businesses, pricing growth, funding stability, aggressive cost control and some volume increase. Moreover, it has solid fundamentals with its geographic diversity and high barriers to entry for the aggregates industry.

However, as regards the public construction market, though the number of large highways 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 #3 (Hold). Other stocks in the building materials sector that are doing better and worth considering include Eagle Materials Inc. ( EXP - Snapshot Report ) ,Texas Industries Inc. ( TXI - Snapshot Report ) and Martin Marietta Materials Inc. ( MLM - Snapshot Report ) ; all carrying Zacks Rank #2 (Buy).