The stock market seems focused on only two types of stocks: technology companies involved with AI, and regional banks—which are going through a crisis.
Investors are ignoring the rest of the stock market, which is just drifting. But that should not stop you from picking out a few investing gems from the large body of adrift stocks.
Let’s look at one particular opportunity in the infrastructure sector…
Every four years, the American Society of Civil Engineers’ (ASCE) Report Card for America’s Infrastructure grades the condition of U.S. infrastructure in the familiar form of a school report card, assigning letter grades based on the overall physical condition of the infrastructure and needed investments for improvement.
The last overall grade, in 2021, was a poor C-minus, so it should not come as a great shock that at least $2.6 trillion needs to be spent to replace unsafe bridges, old dams and potholed roads if the country’s infrastructure is to be brought up to a better grade.
As the United States goes through a program of upgrading its crumbling infrastructure over the next decade, there will be a structural demand story for basic materials.
With infrastructure spending in the background, the intersection between the price of their products and the cost of their inputs is aligning to make it a very good time to be a company involved with construction supplies (aggregates, cement, etc.) in the U.S.
For instance, the average cost for U.S.-made cement hovered around $130 per metric ton in 2022. That is its highest average level for many years, and it has barely fallen—despite forecasts of lower demand from construction projects linked to the residential housing market.
Meanwhile, costs have started to fall for inputs like natural gas, which concrete firms use in large quantities in their production process. The Henry Hub spot price for natural gas has fallen to levels last seen in August 2020. This much lower natural gas price will benefit the concrete producers. The combination of falling input costs (apart from labor) and high prices will make it a very profitable year for the sector.
Let me bring to your attention one company that will benefit from the large infrastructure projects because it can supply the needed materials in huge quantities: Vulcan Materials (VMC). Based in Birmingham, Alabama, Vulcan is a leading supplier of crushed aggregates and a producer of downstream basic materials like asphalt and concrete. It has 400 active aggregates facilities, 70 asphalt facilities and 240 concrete facilities across 22 states in the U.S., as well as in British Columbia, Canada.
Vulcan provides the basic materials for the infrastructure needed to maintain and expand the U.S. economy. Aggregates (Vulcan is the largest producer) are used in most types of construction and in the production of asphalt mix and ready-mixed concrete. Vulcan’s materials are used to build roads, tunnels, bridges, railroads, airports, hospitals, schools, and factories that are essential to the U.S. economy.
The company dominates construction materials markets in the southern U.S., but still continues to expand aggressively. For example, in 2021, Vulcan acquired U.S. Concrete for $1.29 billion. This acquisition gave it a greater foothold in metropolitan areas of Texas and complemented its existing facilities in the state, as well as in the prime markets of New York, New Jersey, and the aggregates segment in California.
Vulcan is benefiting from a growing volume of projects in the highways sector. Keep in mind that approximately half of the company’s sales of aggregates come from publicly funded projects.
The first of the projects funded by the U.S. government’s infrastructure plans started to come through last summer. According to official statistics, the number of highway projects starting in August 2022 was 14% higher year-on-year, reflecting both a return to pre-pandemic normality, as well as the higher levels of government funding. About 40% of the $850 billion in guaranteed funding from the U.S. Infrastructure and Jobs Act is focused on highways and bridge renewal.
Why Buy Vulcan Materials?
Vulcan Materials reported strong first-quarter results that included strong pricing gains and just a moderate pullback in shipments. Revenue increased 7% year over year, largely driven by robust growth in its aggregates business. Gross margin expanded 90 basis points year over year to 18.3%, as higher selling prices offset higher raw material costs.
On the last earnings call, management raised its full-year revenue and net earnings guidance, largely due to the strong performance and pricing gains in its aggregates business. Aggregates account for more than 70% of Vulcan’s consolidated revenue and an even larger portion of the company’s gross profit.
An increasingly industrial policy-driven U.S. economy is accelerating demand for construction materials. According to Census Bureau data, spending on factory construction hit an all-time high of $108 billion in 2022, as more and more companies reshored their production back to the U.S.
Infrastructure projects are resilient during economic downturns, as governments tend to fund projects through the cycle to support the economy and prevent job losses. Stable demand has supported consistent price increases through economic cycles and led to subsequent margin expansion for companies like Vulcan.
From 2007 to 2021, Vulcan’s price increases exceeded inflation in all but five years. During this period, the company’s price per ton grew over 90%, while inflation rose roughly 31%. Also, the company only recorded one year of price contraction during this 15-year period. This is evidence of the firm’s pricing power, even during times of softer demand
This suggests that investors should realize there will be an extended business cycle for materials suppliers, despite the slowing housing market.
VMC is a buy below $200 per share.
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