By the end of last week, all of the major indices had pushed to or near a fresh set of all-time highs. The broad rally that began when the U.S. and China officially signed Phase One of what everybody hopes is a long-term trade deal gave the markets plenty of incentive to start looking into the rest of the year with an increased sense of optimism. In the last couple of weeks, some of that enthusiasm has been dampened by the outbreak of coronavirus in China. As the number of cases increases, countries all over the world are on the lookout to determine the extent of exposure that will cross their borders. Even so, most expert forecasts, including the World Health Organization seem to hint that the net effect of the virus should be short-term at best. That news seems to have given the market enough momentum to keep pushing higher.
The market’s rally has been good for a number of sectors, including the Materials sector. Economic indicators show that the U.S. remains healthy; that includes real estate prices, where sales of new and existing homes have generally remained solid. That may be part of the reason that the sector is only about -1.5% off of its highs at the end of December. That is probably also one of the reasons that stocks in the Construction Materials industry have performed well so far.
Vulcan Materials Co. (VMC) is a good example, increasing a little over 2% so far this year. That might not sound very compelling given the fact that the stock increased more than 50% over the course of 2019; but under normal circumstances, an increase in price of more than 12% in a given year is usually something that most long-term investors would be happy to work with. VMC is a company with a solid fundamental profile, and a number of elements of that profile that give the company a strong long-term outlook for its prospects through the rest of the year. The question for a value-oriented investor, however is whether the stock also offers a good value proposition? Let dive in to find out.
Fundamental and Value Profile
Vulcan Materials Company is a supplier of construction aggregates (primarily crushed stone, sand and gravel) and a producer of asphalt mix and ready-mixed concrete. The Company operates through four segments: Aggregates, Asphalt Mix, Concrete and Calcium. The Aggregates segment produces and sells aggregates (crushed stone, sand and gravel, sand, and other aggregates) and related products and services (transportation and other). The Company produces and sells asphalt mix in Arizona, California, New Mexico and Texas. The Company produces and sells ready-mixed concrete in Georgia, Maryland, New Mexico, Texas, Virginia, Washington District of Columbia and the Bahamas. The Calcium segment consists of a Florida facility that mines, produces and sells calcium products. As of December 31, 2016, it had 337 active aggregates facilities. The Company sells aggregates that are used as ballast for construction and maintenance of railroad tracks. VMC has a current market cap of about $19.5 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased by 20%, while revenues improved by 14.4%. In the last quarter, earnings grew by 13.5% while sales strengthened by 6.86%. The company’s margin profile is a source of strength; Net Income as a percentage of Revenues in the last quarter is 15.2% versus 12.4% over the last twelve months.
Free Cash Flow: VMC’s free cash flow is $500 million. That represents an improvement from a year ago, when Free Cash Flow about $420.5 million. Its current Free Cash Flow translates to a modest Free Cash Flow of almost 2.57%.
Debt to Equity: VMC’s debt to equity is .57, a conservative number that signals the company’s conservative approach to leverage. Their balance sheet, however is a red flag, as cash and liquid assets were just $91.1 million versus $3.17 billion in long-term debt. The company’s solid, and strengthening Net Income suggests that despite legitimate questions about its liquidity, VMC’s operating profits are sufficient to repay their debt.
Dividend: VMC’s annual divided is $1.36 per share, which translates to a yield of about 0.93% at the stock’s current price.
Price/Book Ratio: VMC’s Book Value is $41.87, which translations to a Price/Book ratio is 3.51 versus their historical Price/Book ratio of 3.23, which suggests that the stock is overvalued by about about -8% right now. By comparison, the stock is about 16% below its historical Price/Cash Flow ratio, suggesting that the stock is undervalued. Using the historical Price/Book ratio as a benchmark puts a useful bargain price at around $108 per share.
Technical Profile
Here’s a look at the stock’s latest technical chart.
Current Price Action/Trends and Pivots: The diagonal red line traces the stock’s upward trend from November 2018 to a peak at around $152.50 in September of 2019, and provides the reference for calculating the Fibonacci retracement levels shown by the horizontal red lines on the right side of the chart. The stock retraced from October to November to a low point at around $136 per share. The stock has rallied from that point to a recent high at $147. That also marks the stock’s most immediate resistance, with support at a consolidation range around $142 per share. A push above $147 could give the stock enough momentum to test its multiyear high above $152, while a drop below $142 should see the stock drop even more to about $136, with the 38.2% Fibonacci retracement level around $126 per share if bearish momentum picks up.
Near-term Keys: VMC’s fundamentals are strong, with the only question mark coming from the company’s limited liquidity levels. Their strengthening Free Cash Flow and Net Income, on the other hand provides the stock a solid long-term outlook. From a value-based perspective, I consider the stock overvalued, with a legitimate value price at around $108 per share. If the stock pushes above $147, however, there could be an interesting short-term bullish opportunity to buy the stock or work with call options, taking profits at the stock’s high at $152. A drop below $142, on the other hand could mark an interesting reversal of the stock’s longer trend, which would be an interesting signal to consider shorting the stock or working with put options. In that case, use $136 as a first, initial profit target and $126 if bearish momentum continues to build.