After soaring on Wednesday, our shares of Vulcan Materials (VMC) gave the majority of that move back yesterday. While some of that was the market’s post January Producer Price Index report move lower, the bulk of that retreat was the weaker than expected December quarter earnings report.

We’re not going to sugar coat it, Vulcan came up short relative to the consensus forecasts for both quarterly revenue and earnings. Management chalked that shortfall up to abnormally wet and cold weather across the company’s geographic footprint, which disrupted construction activity, as well as the slowdown in single-family residential construction.

As background, Vulcan tends to operate in the lower third of the country from California to the Carolinas, the Mid-Atlantic and up into New England. While that is disappointing, we have encountered this before and understand that weather can disrupt timing and that explains why Vulcan tends not to comment on a quarterly basis but rather on an annual one.

The downdraft in the housing market will offset continued progress in other areas, such as infrastructure. However, the prospects in the end markets tied to infrastructure, reshoring the chip industry and other areas tied to the Inflation Reduction Act continue to look very promising. To that end, Vulcan management shared state and local budgets for 2023 and 2024 and sees the impact on its business accelerating as we move through 2023 and more meaningfully in 2024.

The net impact led Vulcan to issue what we suspect will eventually prove to be conservative volume guidance that calls for aggregate shipments to fall 2%-6% in 2023. Given cadence for the nonresidential side of the business, we suspect that means a slow start to the year with improving volumes as we move throughout the balance of 2023.

That largely meshes with our view that sees the influence of Washington stimulus building quarter over quarter throughout this year with a more meaningful impact in 2024. Also impacting Vulcan’s 2023 volume outlook, during the December quarter, the company completed a previously announced sale of ready-mix assets in New York, New Jersey, and Pennsylvania.

A Positive Note

On a positive note, the pricing environment remains robust for Vulcan’s aggregates, which is targeted to increase 11%-13% year over year, driving revenue as well as margin improvement, more than offsetting volumes. Laying the groundwork for that pricing target, Vulcan implemented targeted increases in October, November, and January.

Industry data compiled by JPMorgan found cement prices were up 7.6% month over month in January, marking the highest monthly increase in years and the firm now sees overall cement prices rising 15% in 2023. Looking at aggregates, the data showed prices were up just over 12% year over year in January and pricing action taken in 2022 is expected to carry over into this year.

In response, we are seeing several price target increases this morning with Truist upping its target to $225 from $210 and DA Davidson boosting its to $212 from $200. Given our longer-term time horizon and the multi-year catalyst ahead for non-residential construction we will keep our One rating intact with VMC shares and look to revisit our current $220 target as we approach the middle of 2023.

By that time, we’ll have a sharper picture on the ramp in nonresidential construction as well as cement, concrete and aggregate pricing. Earlier this month, we picked up some VMC shares near $185, and we are inclined to some additional back filling between $180-$185. If the shares moved past the $180 level, we would be more aggressive buyers. As we head into today’s market, we could see that happen today, but more than likely we would hold off until early next week at the soonest, allowing the shares to settle some before we make our next move.


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