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Vulcan Retained at Neutral

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On Jul 5, we maintained a Neutral recommendation on Vulcan Materials Company (VMC - Free Report) due to the steady recovery in its end markets, despite sluggish first-quarter results.

Why the Neutral Recommendation?

Vulcan’s first-quarter 2013 results announced on May 2, were not encouraging. Adjusted net loss of 49 cents per share was wider than the Zacks Consensus loss estimate of 36 cents per share and prior-year quarter’s adjusted loss of 45 cents. Total revenue grew only 0.4% due to lower volumes in the aggregates segment. Following the sluggish first-quarter results, estimates mostly moved downwards for 2013 and 2014.

Despite persistent volume weakness, aggregates pricing continues to gain traction, which is encouraging. Moreover, Vulcan reaffirmed its 2013 aggregates volume growth guidance despite first-quarter shortfall on expectations of faster growth in the second half.

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. Management is expecting solid growth in aggregates 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 aggregates and non-aggregates due to steady private construction growth; pricing gains; funding stability for public construction; and aggressive cost controls. Moreover, Vulcan has solid fundamentals with its geographic diversity and high barriers to entry for the aggregates industry.

The new highway bill is expected to give a boost to the public construction market. Even though the increased funding from the bill ensures large highways and industrial projects, 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 worth considering are Eagle Materials Inc. (EXP - Free Report) , carrying a Zacks Rank #1 (Strong Buy) and Anhui Conch Cement Co. Ltd. (AHCHY - Free Report) and Martin Marietta Materials Inc. (MLM - Free Report) , both carrying Zacks Rank #2 (Buy).

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