If politicians are to be believed Vulcan Materials (VMC) would be my perfect earnings recession stock. Revenue and earnings look on a steady uphill trend in 209, after carving out that track in 2018. The company’s business is almost totally domestic. And there’s even a catalyst–if politician can be believed.
Vice-President Mike Pence told the National Governors Conference that a big administration infrastructure bill is on its way to passing Congress. That’s plausible because Democrats are known to favor an infrastructure package sine 1) the country needs it and 2) it would give them a positive achievement to run on in 2020.
Unfortunately, the sources that cover Capital Hill say no one has seen any signs of a White House infrastructure bill and that the idea of a bill is bogged down in deep disagreement over how to pay for it. I don’t give an infrastructure bill better than 1 in 3 odds for 2019.
But even without this specific catalyst the general news on infrastructure pending is good for Vulcan Materials. State highway spending–which means the purchase of the aggregates that Vulcan produces–strengthened last year and look to be higher in 2019.On February 14, the company reported fourth quarter revenue of $1.09 billion, up 11.3% year over year and slightly ahead of the $1.08 billion Wall Street consensus projection. Earnings of 99 cents a share were 10 cents a share above the analyst consensus. Shipments hit 49.7 million tons against 46 million tons in the fourth quarter of 2017.For 2019 the company told Wall Street and investors to expect earnings of $4.55 to $5.05 a share, a rather wide range, but higher at the high end than the $4.85 Wall Street was expecting for the year. Aggregate shipments should grow by 3% to 5% on the year.The stock is a member of my 50 Stocks Portfolio. The shares were up 13.09% since I added them to the portfolio on December 14, 2018.
Today, February 25, I’m adding the stock, which is a member of my long-term 50 Stocks Portfolio to my Jubak Picks Portfolio as well. With its February 22 close at $112.68, Vulcan Materials has moved strongly above the 200-day moving average and resistance in the $107.50 level. The shares now stand a good chance of moving up to the June high of $132.89.
The longer term logic behind this pick is pretty simple–as I laid it out in my Special Report: Is Your Portfolio Ready for Global Warming.” on my Subscription JubakAM.com site. As the most recent hurricanes have confirmed, the Southeastern United States is extremely vulnerable to the effects of early stage Global Warming. Florida cities find water in the streets whenever the tides back up and the drinking water system of much of the state is vulnerable to salt water infiltration. The low lying lands of the coast in South and North Carolina face encroachment from rising sea levels and dangerous floods whenever the more intensive storms that result from Global Warming connected changes in weather patterns linger over the hills of the Piedmont. Virginia Beach and the Norfolk naval base face not just rising sea levels but an acceleration in the pace of that rise. (This isn’t to say that other areas along the East Coast don’t face dire challenges. I live in New York City and I can give you a list.) Vulcan Materials is the United States’ largest producer of construction aggregates and its largest markets read like a Who’s Who of areas with Global Warming threats: Alabama, California, Florida, Georgia, Illinois, North Carolina, South Carolina, Tennessee, Texas, and Virginia. One of the peculiarities of the aggregate business is that aggregates are bulky and at $10 to $20 or more a ton, they weigh a lot for their value. Which means that it doesn’t pay to ship aggregates long distances–most aggregates tavel by truck and outside a range of 70 miles or so transportation costs start to exceed the cost of the aggregates themselves. So if your aggregates sources are near your aggregate markets, you’ve got a big competitive advantage. Vulcan has roughly 3.8 billion tons of aggregate reserves and more than 100 operating plants in the region stretching from Texas to Florida. (In total Vulcan has–16 billion tons of reserves–roughly 50 years of aggregate supply at peak production levels.) If Congress and the White House can agree on anything in 2018, it’s likely to be an infrastructure bill–which would add a near term boost to any longer term Global Warming demand. Morningstar puts a fair value estimate of $135 on the shares.”
The shorter-term logic rests on a recovery in aggregate demand in the public sector as states spending on highways has picked up in key states in Vulcan’s market: Texas, California, Virginia, Georgia, and Florida. Highway needs are pressing (and large) in these states and they also on average have the strong state level finances to fund an increase in spending. (At the Federal level, the problem is that historically highway construction has been funding by the 18 cent a gallon gasoline tax. That tax hasn’t increased since 1993 and the highway trust fund lags behind needs. The FAST Act, passed in December 2015, provided stability and some near-term funding certainty, but didn’t solve the gas tax problem or provide a funding mechanism for increased funding. As the tepid governors’ reception of Pence’s infrastructure call out indicted, the states are extremely skeptical that Congress will either 1) borrow more money for infrastructure spending on top of the soaring budget deficit, or 2) raise taxes. I share the governors’ skepticism.)
But Vulcan’s strong presence in a southern region that stretches from Florida to Texas puts significant tailwinds at the company’s back. Shipment growth in this region is expected to be above the national average and the region undersupplied with new aggregate deposits, which will limit new competitors in the region. Vulcan itself has 3.8 billion tons of aggregates reserves in the region. as I noted back on December 14.
Any infrastructure bill from Washington would, of course, be a nice bonus. I’m setting a target price of $132 a share for Vulcan Materials.