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Martin Marietta Banks on Aggregate Business Amid Weather Woes

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Martin Marietta Materials, Inc. MLM is poised to benefit from its aggregates business, robust underlying construction market fundamentals, higher demand for public sector infrastructure and acquisition synergies.

Recently, the company reported 2019 earnings results, which marked the most profitable year in its history. Improved shipments, pricing and profitability across major part of the Building Materials business helped it to achieve the eighth consecutive year of growth in revenues, gross profit, adjusted EBITDA and earnings per share (read more: Martin Marietta Q4 Earnings Miss Estimates, Up Y/Y).

Shares of the company have also outperformed the industry in the past year.

However, weather-related challenges, higher costs, and lower margins aggregates-related downstream operations are concerns.

Let discuss the factors that are driving this Zacks Rank #3 (Hold) company. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Factors Substantiating Growth

Being a leading supplier of construction aggregates in the United States, Martin Marietta has a vast network of aggregate quarries and distribution centers throughout the southern United States. Also, it operates in the Bahamas and Canada, and has distribution centers along the Gulf of Mexico and Atlantic coasts.

Strong underlying demand is likely to boost its sales and profits at the Aggregates business in the forthcoming quarters. Also, stable public sector spending, as public construction projects are less affected by general economic cycles, is anticipated to benefit the company’s results in the near term. In 2020, it expects infrastructure shipments to grow meaningfully, driven by healthy state Department of Transportation (DOT) budgets and an expected extension or replacement for the Fixing America’s Surface Transportation (FAST) Act.

Increased commercial and heavy industrial construction activities are likely to aid aggregate shipments to the non-residential market (which represented 36% of 2019 aggregate shipments). The company expects large energy-sector projects, particularly along the Gulf Coast, to continue driving growth and boosting aggregates demand over the next several years.

Notably, the company completed more than 90 acquisitions since 1994, which enabled it to enhance and expand its aggregates-led presence in the building materials marketplace.

Potential Headwinds

Martin Marietta’s businesses are subjected to weather-related risks that can significantly affect production schedules and profitability. The first and the fourth quarter of every financial year are affected by winter. In fact, weather, contractor capacity issues and logistics disruptions have put pressure on the company throughout 2018. The asphalt and paving business — which operates solely in Colorado — witnessed lower production days due to continued extreme weather. The trend witnessed a 4.1% decline in asphalt shipments in fourth-quarter 2019.

During 2019, the company, which share space with Forterra, Inc. (FRTA - Free Report) , Cornerstone Building Brands, Inc. CNR and CEMEX, S.A.B. de C.V. CX in the same industry, incurred higher late year costs for contract services, repairs and supplies that put pressure on incremental margin.

Martin Marietta’s aggregates-related downstream operations have lower gross margins (excluding freight and delivery revenues) than its aggregates product line due to highly competitive market dynamics, lower barriers to entry and volatility in fuel costs. Any further expansion of the segment will be a major hurdle for the company.

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