Vulcan materials (NYSE: VMC) remains a relatively large company with a market capitalization of $22 billion and an S&P Credit rating of BBB+, which gives confidence. They are larger in the southern United States but remain the largest producer of aggregates (such as sand, gravel and crushed stone) used in construction in the United States. The company, at its core, is driven by the aggregates segment (Figure 1). This is the most important segment and the one that also presents the best prospects for activity and growth. VMC remains relatively conservatively managed and operated and expects strong growth in its core business, resulting in high EPS growth potential in 2023 and 2024. In the remainder of the article, I explain why I believe the company’s current valuation should be considered and why investors should be cautious.
VMC was handled with care and caution. Their FFO to interest coverage is good and has improved in recent years. The ratio of total liabilities to total assets was slightly better between 2014 and 2019, but it has increased again over the past three years. Even with the recent acquisition of US Concrete, their leverage target reaches 2.5x. VMC’s operational efficiency also improved slowly and steadily. Although working capital turnover rebounded a little, it did not move in an overly negative direction. In addition, overall inventory turnover has steadily improved over the past decade. These numbers suggest careful and cautious management and, as noted in the second quarter earnings call, their efforts to “improve the effectiveness of our plans to continue to offset the impacts of rising input costs.”
Their current ratio of 1.9x and quick ratio of 1.3x are good, although a little below the building materials industry averages of 2.1x and 1.5x, respectively, with interest coverage VMC of 6.2x, which seems reasonable.
Q2 2022 results were good (Source: Q2 2022 supplemental information for the earnings call). Aggregates increased 9% to 63.8 million tonnes with gross cash profit of $7.99/ton, up 2%. They see housing starts in the markets they serve up 7% year-on-year, private non-residential starts in their markets up 20% year-on-year, and highway starts in up 9% year-on-year in June. . They have a weighted average debt maturity of 11.4 years, which is valuable in this environment. Their CAPEX remains as expected, despite their notes on the Q2 call on how “the supply chain made it difficult to integrate some of this equipment that we had planned to deliver last year.”
Reasons for caution
There are four points of caution to draw your attention to.
First, there is a reasonable level of goodwill on the balance sheet. I’m not a big fan. I make about a quarter of the assets on the balance sheet. I thought it was probably related to the earlier acquisition of US Concrete in 2021, but there was a reasonable amount of goodwill on the balance sheet from years earlier. This is something I am wary of as I have seen this use of goodwill later turn into impairment charges, creating a substantial, unwanted and often surprising hit to earnings.
Second, EPS growth has been declining in recent years. I put the estimated five-year EPS growth at 8.6%, three-year EPS growth at 1.5% and one-year EPS growth at -10.1%. This continued deceleration and then declining EPS levels are concerning and are likely one of the drivers of the recent stock price downturn. Part of the challenge may be due to the earlier acquisition of US Concrete, which may disrupt some of these measurements for some time.
Third, this is a difficult stock to predict. The FAST Graphs analyst dashboard notes a 1-year lead (10% margin of error) of 23% beats, 23% hits, and 54% misses. The 2-year-old forward (20% margin of error) is 15% beats, 23% hits, and 62% misses. Thus, analysts are twice as wrong as they are wrong. Recent analyst moves and the downward revision of EPS expectations for the coming years are of immediate concern (Figure 5, below).
Comparison with peers
For a comparison with peers, I selected several in the building materials industry. MDU is included as a conglomerate, with approximately $2,228 million of $5,680 million of their revenue from building materials and services:
- CRH plc (CRH)
- CEMEX, SAB de CV (CX)
- Eagle Materials Inc. (EXP)
- MDU Resource Group, Inc. (MDU)
- Martin Marietta Materials, Inc. (MLM)
VMC is relatively expensive compared to its peers, as we can see in the following comparisons; it tends to be the highest (EV/EBITDA) or close to the most valuable company. By way of comparison, for the building materials industry, EV/EBITDA is 6.8x on average, with a P/E of 10.9x, a price/sales ratio of 0.6x and a price ratio /book value of 0.9x.
EV/EBITDA tends to be high, much higher than some of the other options in this industry (Figure 2). It’s not outrageously high, with MLM having a comparable value, but it’s significantly (three times) that of the most affordable company in this comparison, CRH, and VMC has one of the highest EV/EBITDA ratios. highest in the industry.
The price to book ratio is also quite varied across the industry. Again, VMC ranks as a higher option in the industry, but not quite the highest in this comparison (Figure 3).
The price-to-sales ratio (Figure 4) also shows relatively high multiples for VMC. As stated elsewhere, VMC expects rapid growth in the coming years and so one of the questions is whether these multiples are justified and reasonable. Would an investor in VMC pay for growth?
Analyst price targets (Finbox.io) suggest a fair value of $198, which I think is a bit optimistic. Analysts are struggling to forecast the company’s earnings, with the FAST Graphs dashboard showing 54% failure for the one-year forecast (with a 10% margin of error) and 62% failure for the two-year forecast (with a margin of 20%). error).
What can we expect from future growth? Long-term expectations for annual EPS growth are reasonable, with estimates ranging from 19.15% (Yahoo) to 14.7% (Factset, via FAST Graphs). Given Factset analyst expectations of 30% in 2023 followed by 27% in 2024, this suggests that 2025 and 2026 could be very difficult years.
To understand the impact, I also generated a few other models. VMC has a limited dividend history and therefore the use of dividend models is limited. Therefore, I used a P/E Multiples model, which suggests a fair value of $171.98. My 10Y DCF Revenues & Exit model suggests a fair value of $194.38. Usually I’m pretty happy with a DCF model, but it still feels high to me.
Using P/E ratios and our expectations for the price to move towards a normalized level against earnings, I like to use FAST Graphs to understand likely returns.
First, the company posted strong earnings growth with EPS growth expectations of 30% in 2023 and 27% in 2024 (Figure 5). Therefore, rather than considering a P/E ratio of 15x, I will switch to using P/E=G for 21.69x. As we can see below in figure f, if we use analyst estimates for the end of 2024 with prices maintaining this P/E ratio and earnings reaching estimates, we are forecasting a price of $27, a 18.2% total rate of return and 7.39% annualized rate of return. This is a conservative estimate, and as we can see recent prices are above this P/E multiple. However, if we look at analysts’ estimate changes (at the bottom of the chart in Figure 5), we can see that estimates have been revised down significantly in some cases, although not as much as I see in d other companies, it gives a reason to pause and consider a conservative outcome.
A more optimistic investor might consider using a more reasonable normalized P/E ratio (Figure 6). Over the past five years, VMC has traded with a P/E ratio of 36.4x, which is rich and perhaps unwarranted. However, if we assume they maintain this P/E ratio and analyst estimates are met at the end of 2024, that would give us an expectation of a price gain of $160, a total rate of return of approximately 98% and annualized rates of return of approximately 33%.
VMC is a relatively well-valued company, but with strong growth expectations. While analysts are particularly optimistic about the outlook for the future, I remain cautious about growth, especially as we head into a more recessionary environment that could lead to a slowdown in construction and VMC’s core business. .
VMC is a solid company and should be relatively reliable. They have proven to be a strong management team focused on maintaining and improving efficiency, with the recent acquisition of US Concrete being well integrated and energizing VMC’s aggregates business.
Using the more conservative P/E=G ratio and analysts’ expectations for 2024, I think investors can reasonably expect upside from this stock, but there is downside potential that needs to be considered, despite strong expected EPS growth in 2023 and 2024 forecast.
Accordingly, I suggest that VMC is a grip for investors.