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Here's Why You Should Hold Vulcan Materials in Your Portfolio

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Vulcan Materials Company (VMC - Free Report) is poised to gain from higher aggregate shipments, strong pricing, expansion efforts and cost-saving initiatives. In fact, earnings estimates have been revised upward over the past few weeks, suggesting that sentiments on Vulcan Materials are moving in the right direction. Earnings estimates for the current year have increased by 0.5% over the past 30 days, reflecting analysts’ optimism surrounding the stock’s earnings prospects. Shares of the company have also outperformed its industry in the past three months.

On the flipside, bad weather and higher costs remain threats. Although shares of the company outperformed its industry, it declined 14% in the past three months.  

Let’s delve deeper into the factors that are likely to drive growth.

Factors Driving Growth

Vulcan Materials, the nation's largest producer of construction aggregates, has been witnessing strong aggregate shipments and pricing underpinned by growing public demand and operational discipline. Notably, aggregate shipments (volumes) were up 10% year over year (6% on a same-store basis) in third-quarter 2018. The company projects mid-single-digit aggregates volume/price growth in 2019. Thus, we are optimistic about pricing and volume growth in the months ahead. Total revenues of $1.24 billion in the third quarter increased 13% from the prior-year quarter. The bottom line also increased about 34.6% on a year-over-year basis in the quarter.

Moreover, public sector construction is expected to grow on the back of large transportation projects and growth in contract work for highways, thereby, increasing demand for its products. The company is witnessing higher public construction demand while private consumer demand in Vulcan-served markets has been recovering steadily.

Meanwhile, the company follows a systematic inorganic strategy for expansion and has wrapped up various bolt-on acquisitions that contributed significantly to its growth. Notably, it closed acquisitions totaling $226 million in 2017. During the first nine months of 2018, the company closed three acquisitions, including aggregates and asphalt operations, complementing its existing positions in Alabama and Texas.

Moreover, the company’s focus on reducing controllable costs and maximizing operating efficiency across the organization is likely to generate higher earnings and cash flow. In fact, strong local operating disciplines, production efficiency and a commitment to continuous improvement led to considerable cost savings for the company.




Concerns

Vulcan Materials’ susceptibility to bad weather, trimmed guidance and higher costs are the major concerns affecting the company’s performance.

Since its products are used outdoors in public or private construction work, demand gets affected due to extreme weather. Moreover, the company’s production and distribution facilities are located outdoor, which affect its ability to produce and distribute products.

In fact, many of the company's markets (North Carolina and Virginia) were impacted by Hurricane Florence along with extremely wet weather in September (in most Texas markets) during the third quarter of 2018. These weather-related woes impacted quarterly earnings by approximately $27 million.

Reflective of these, the company trimmed its EPS guidance for 2018 to $3.85-$3.95 from $4.00-$4.65 mentioned earlier. Although the company has stated that this extreme bad weather is a short-term disruption and not expected to have a long-term impact on its underlying demand and pricing, we wait for better visibility.

Moreover, the company is experiencing higher diesel and liquid asphalt costs. During the third quarter of 2018, margin improvement was dampened by a 28% increase in the unit cost for diesel fuel and weather-related operating inefficiencies.

Zacks Rank & Stocks to Consider

Vulcan Materials currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the Construction sector are Great Lakes Dredge & Dock Corporation (GLDD - Free Report) , KBR, Inc. (KBR - Free Report) , and EMCOR Group, Inc. EME. While Great Lakes currently sports a Zacks Rank #1 (Strong Buy), KBR and EMCOR carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Great Lakes’ 2018 earnings are expected to increase 111.1%.

KBR surpassed earnings estimates in three of the past four quarters, the average positive surprise being 12.6%.

EMCOR has projected earnings growth rate of 20% for the current year.

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