Vulcan Materials' Inorganic Drive Strong, Bad Weather Hurts

Vulcan Materials Company’s (NYSE:VMC) bolt-on acquisitions, strong aggregate reserve position and improvement in private construction activities are encouraging.

The company follows a systematic inorganic strategy for expansion and has wrapped up various bolt-on acquisitions. The company has closed acquisitions totaling $212 million so far this year.

In the first quarter of 2017, the company took over facilities, a marine aggregates distribution yard and building materials yards in California. Meanwhile, in Tennessee, it acquired an aggregates facility, asphalt mix operations, an asphalt paving business and a rail-served aggregates operation. In the second quarter of 2017, the company signed an agreement with SPO Partners to buy the latter’s aggregates business — Aggregates USA LLC. These buyouts expand its ability to serve customers well and bring in operational and commercial synergies. In 2016, Vulcan expanded its aggregates distribution capabilities in Georgia and completed two strategic bolt-on acquisitions in New Mexico and Texas.

Moreover, an improvement in private construction activities, especially private residential construction, bodes well as sustained growth in private construction activity drives demand for aggregates as well as non-aggregates businesses of Vulcan Materials.

Positives like an improving economy, modest wage growth, low unemployment levels, positive consumer confidence and a tight supply situation raise optimism about the sector’s performance. As such, demand for Vulcan Materials’ products should rise as well, thereby driving revenues.

Also, a strong aggregates business is a major positive for Vulcan Materials. The company is the largest producer of construction aggregates in the United States, possessing the largest proven and probable reserve base in the country. Importantly, the aggregates industry is characterized by high barriers to entry as there are limited substitutes for quality aggregates, thus placing Vulcan Materials favorably.

Inclement Weather Hurts

Seasonal influences on construction activity weigh heavily on the company’s performance. Inclement weather conditions affect the company’s ability to produce and distribute products as its production and distribution facilities are located outdoors.

In the third quarter of 2017, hurricanes Harvey and Irma had a major impact on Vulcan's operations and results. Operations in key Southeastern markets, particularly Florida and Georgia, as well as coastal markets in Texas and along the central Gulf Coast were disrupted. Aggregates shipments were lowered by at least 1.5 million tons during the quarter. Apart from the immediate impact of the storms, labor market disruptions, haul truck shortages and other logistical challenges continue to trouble. Overall, aggregates shipments declined 1% in the first nine months of 2017.

Bad weather conditions and below-trend shipment growth led to a 4.9% decline in Vulcan Materials’ shares this year, wider than the industry’s fall of 2.4%.

Nevertheless, we expect rebuilding efforts owing to the hurricanes along with a rise in private construction activities to boost demand for Vulcan Materials’ products in 2018. Notably, the Zacks Consensus Estimate for earnings calls for an improvement of 6.9% in 2017 and 33.4% in 2018.

Zacks Rank & Stocks to Consider

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

A few better-ranked stocks in the sector are Patrick Industries, Inc. (NASDAQ:PATK) , United Rentals, Inc. (NYSE:URI) and Armstrong World Industries Inc (NYSE:AWI) . All three companies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

United Rentals is expected to see an 18.1% rise in 2018 earnings.

Patrick Industries is expected see 16% earnings growth in 2018.

Armstrong World Industries’ earnings are expected to rise 8.8% in 2018.

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