Building Back Solid
As the nation begins to build again, Vulcan Materials reclaims a solid footing, with its hold on the world’s most valuable aggregates franchise.
Vulcan’s Calica Quarry, in Quintana Roo, Mexico, which began production in 1989, has won a National Stone Association Showplace Award.
Photo by Hugh Hunter
Less than five years ago, Vulcan Materials Co. was struggling on three fronts. The nation’s construction industry was flat as a pancake in response to a major recession. The company still carried a heavy debt load after spending $4.6 billion to purchase a competitor on the eve of the recession. And another competitor stood poised to swallow up Vulcan in a hostile takeover attempt.
But four years after shaking off the hostile action, Birmingham-based Vulcan is back on track — increasing earnings, watching its stock price grow and attracting favorable analyst ratings — as the nation’s gradual economic recovery has reheated the market for road and building materials.
The company is poised for future financial health, having trimmed operating costs during the recession and currently having access to an estimated 16 billion tons of construction aggregate reserves, says Tom Hill, Vulcan’s chief executive officer. “That’s enough for several generations to come,” he says. “We have the most valuable aggregates franchise in the world.”
Analyst Trey Grooms, managing director of equity research for Stephens Inc., says Vulcan Materials’ key strength in the current economy is its “high quality, local aggregates reserves in some of the most attractive U.S. geographies, with all three of its key end markets (infrastructure, private non-residential and new residential construction) moving in the right direction.”
The outlook for increased highway construction is good — at least for the next few years — following the passage of the national FAST (Fixing America’s Surface Transportation) Act, signed into law by President Barack Obama in late 2015. The five-year federal highway bill provides average annual funding increases of 3 percent. “A number of states, including Texas, Florida, Georgia, Virginia and the Carolinas have passed their own substantial highway funding initiatives,” Hill says.
Hill would like to see the federal and other state governments make additional infrastructure investments in the highway system, as it was rated D-plus by the last report card of the American Society of Civil Engineers. “There doesn’t seem to be the political will out there to pass a user’s fee (tax on gasoline) to do what needs to be done to bring our highway system back to an acceptable level,” Hill says.
The economic downturn that began in 2008 didn’t hit Vulcan Materials initially, because of a backlog of projects that kept bringing in revenues. As the recession continued, however, the company faced several quarters of being embarrassed by overly optimistic revenue projections. “It was difficult at the time to make accurate projections,” Hill says.
Vulcan Materials brought in $450.9 million in net earnings for 2007, during the height of the construction boom. The company’s losses then bottomed out at $96.5 million in 2010 and $70.8 million in 2012.
Construction markets now have experienced several years of recovery, which began for Vulcan Materials in earnest during the second half of 2013 and continue to build. The company’s gross profit hit $858 million in 2015, a 46 percent increase over 2014.
Analysts agree with the company that revenues likely will continue to remain strong in the coming quarters, because of growing demand for Vulcan Materials’ gravel, crushed rock, sand, asphalt and cement.
“We still believe we have a good way to go in the recovery,” Hill says. “All sectors of the economy we serve are picking up steam. Housing growth for single and multi-family homes is strong, nonresidential building is growing, and public sector spending is growing.”
The company’s choice to purchase major competitor Florida Rock Industries, at a cost of $4.6 billion in November 2007, significantly hurt Vulcan Materials in the short term as the recession’s effects ramped up and the debt load weighed heavily. But that key acquisition is now benefitting the company, Hill points out. “It’s been great to see the original decision proven to be a good one,” he says.
During the recession, the debt from the Florida Rock purchase made Vulcan Materials vulnerable to a hostile takeover bid from Martin Marietta Materials Inc. in 2012. While the downturn and Vulcan’s successful fight against the takeover were difficult, the challenge led to positive changes for the company, Hills says.
“We worked really hard through the downturn to improve our business, so that we could take full advantage of this upturn,” he says. “Our people have done a great job running our plants efficiently and cost effectively to meet growing customer demand. As a result of these efforts, our unit profitability is better today than it was at the prior peak — remarkable if you consider we lost more than 50 percent of our volume as a result of the downturn.”
Recent strategies, including selling a ready-mix cement plant in Florida and buying an Oklahoma quarry with distribution yards in Dallas from Martin Marietta, bode well for the company. Martin Marietta was forced to sell the quarry because of buying a cement plant in Texas. “Our focus is on aggregates because we have found them to be more profitable,” Hill says. “Almost 90 percent of our segment earnings come from aggregates.”
Vulcan Materials has quarries and operations in 20 states, plus Washington D.C., Mexico and the Bahamas. The company is represented in 19 of the country’s 25 fastest growing markets. Because of metropolitan buildout, Vulcan’s presence in “high growth large metropolitan markets like San Francisco, LA, Atlanta, Washington D.C., would be impossible to replicate today,” Hill says.
The company has the capability to easily ramp up its operations by adding hours and staffing, having focused on developing “superior execution processes” through continuing improvement, Hill says. “I am very proud of our people and the job they are doing,” he says. “Our local teams throughout the company are executing extremely well. They have maintained operating discipline and focus while challenged by rapidly increasing volumes.”
Analysts are bullish on the company’s financial prospects in the next few years, assuming there are no major construction market upsets. “The stock isn’t cheap at over 13 times our 2017 EBITDA (earnings before interest, taxes, depreciation and amortization) estimate, but with high quality assets, a solid balance sheet and strong earnings power at an attractive point in the cycle, I believe Vulcan Materials Co. is a solid investment for those with a one- to three-year investment horizon,” Grooms says.
Grooms and other analysts believe the company’s management has Vulcan Materials well poised to take advantage of the continuing construction market recovery. “Vulcan Materials Co. has divested of lower value/non-core assets while improving the balance sheet through the toughest downturn since the Great Depression,” Grooms says. “We would expect significant cash flow generation through the next several years as we progress through the ongoing recovery, and we expect management to deploy capital towards disciplined tuck-in aggregates acquisitions and returning cash to shareholders through increased dividends and share buybacks.”
Kathy Hagood and Art Meripol are freelance contributors to Business Alabama. She is based in Homewood and he in Birmingham.