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Max Young

VMC AT A GLANCE

P/E ► -34.7   EV/EBITDA ► 21.4 HIGH ROA ► 0.1% AVG ROE ► -4.3% AVG Debt to Equity ► 1.21 AVG Current Ratio ► 1.24 LOW Interest Coverage Ratio ► 0.0422 AVG

 

 

 

 

 

 

Vulcan Materials Company (NYSE: VMC) is the largest producer of construction aggregates in the United States by sales. Aggregates include gravel, sand, and crushed rock and are used to make composite building materials like asphalt and concrete. The construction aggregates produced by VMC are used in projects as diverse as constructing airports, highways, and home foundations. The company focuses on areas with above-average population and aggregates demand growth.

Public construction projects, such as bridges, dams and roads are responsible for almost 50% of the company's business. ^[1] These projects tend to be less dependent on economic factors and provide a degree of revenue stability. That said, in 2007, approximately 19% of the company's revenue came from sales related to the residential construction market. The subprime lending crisis, which began in mid-2007, led to a marked reduction in new home construction during the latter half of 2007 and the first half of 2008. Over the last several years, limited competition has resulted in greater pricing power for companies like VMC. As such, in spite of a drop in sales volume during the 2007 fiscal year, VMC was able to keep revenue flat by increasing its average prices by 13%.^[2]

Like nuclear power plants and garbage dumps, quarries, which create noise and dust, are also subject to the "not in my backyard" mentality. Most residents prefer not to have a quarry within close proximity. This makes getting the zoning permits necessary to open a new quarry in a metropolitan area difficult. Construction aggregates are also expensive to transport due to their high density, and most aggregate producers are limited to supplying customers within a 50 mile radius.^[3] As a result, aggregate producers in one region do not typically face competition from producers in other regions.

In November 2007, Vulcan acquired Florida Rock Industries, Inc. for $4.2 billion in cash and stock.^[4] Florida Rock makes construction aggregates, cement, and concrete for the southeastern, southwestern, and mid-Atlantic states. The acquisition added 1.6 billion tons of proven and probable aggregate reserves.^[5] Moreover, Florida Rock gives VMC access to several regions in the U.S. where the population growth is greater than the national average. Including areas the Florida Rock acquisition gives VMC access to, population and aggregates demand growth in Vulcan-served states are about 1.25% and 2%, respectively, compared to .75% and .8% in non-Vulcan states.^[6]

Business Overview

Vulcan Materials Company operates primarily in the United States; in 2007 it shipped 231 million tons of aggregates to 22 states, the District of Columbia, the Bahamas, and Mexico from 334 facilities.^[7] The ten largest states, measured by aggregates shipments, accounted for 85% of overall aggregate shipments.^[8] Vulcan's estimated reserves of 12.7 billion tons of aggregates are sufficient for, by the company's estimate, 43 years of production measured at FY2007 annual production levels.^[9]

Previous to the acquisition of Florida Rock Industries, Vulcan's business was organized into seven regional divisions; after the acquisition, VMC has redefined its business into three operating segments, based on the company's principal product lines: aggregates, asphalt mix, concrete and cement. The Asphalt mix and Concrete segment are folded into one reporting segment on financial reports due to their similarities. ^[10] Net sales by segment for FY2007 are broken down as follows:

• 75% of net sales originated from the Aggregates segment, which mines, processes, distributes and sells sand, gravel and crushed stone.
• 24.8% of net sales originated from the Asphalt mix and Concrete segment, which produces and sells asphalt mix, ready-mixed concrete, concrete block, prestressed concrete beams and precast concrete, and sells other building materials.
• 0.2% of net sales originated from the Cement segment, which mines, produces and sells Portland cement (a common type of cement used in the production of concrete) and masonry cement, imports, grinds, blends and sells cement and slag, and produces and sells calcium products.

Revenues and Operating Earnings

Vulcan's total revenues decreased by 0.44% in FY2007 after an increase of 15.4% in FY2006; net sales, however, increased by 1.6% and 16.3% in FY2007 and FY2006, respectively. Operating earning increased by 2.8% and 45.8% in FY2007 and FY2006, respectively.

^[11]

End Markets

The breakdown of end uses for aggregates shipments for FY2007 is as seen in this pie chart.

^[12]

• Public construction markets are usually the most aggregates intensive, and have been more stable than private end use markets due, in part, to the fact that public construction is not as sensitive to interest rates.^[13] Public markets are funded through combinations of federal, state, and local government spending, although most funding for infrastructure comes from the Federal Highway Trust Fund. Other public construction end uses are airports, sewer and waste disposal systems, water supply systems, dams, reservoirs and government buildings.
• Private Non-Residential construction markets are more aggregates intensive than private residential construction, and is driven by economic indicators such as job growth, vacancy rates, and demographic trends. Activity for this end use is also determined by a firm's ability to finance.^[14] Examples of this end use include stores, shopping centers, warehouses and parking decks as well as schools, hospitals, churches and entertainment facilities.
• Private Residential construction demand for VMC's products generally occurs early in the infrastructure phase of residential construction and later as part of the foundation, driveway or parking lot.^[15]
• Other uses for aggregates are as ballast used by railroads for construction and maintenance of track. Riprap and jetty stone are sold for erosion control along waterways. Stone also can be used as a feedstock for cement and lime plants and for making a variety of adhesives, fillers and extenders. Coal-burning power plants use limestone in scrubbers to reduce harmful emissions. Limestone that is crushed to a fine powder also can be sold as agricultural lime.^[16]

Geographic Analysis

^[17]

The above map shows Vulcan facilities throughout the United States, Bahamas, and Mexico. The top 10 aggregate-served Vulcan states are: California, Texas, Florida, Georgia, South Carolina, North Carolina, Virginia, Tennessee, Mississippi, and Illinois. The other 12 aggregate-served states are: Pennsylvania, Michigan, Wisconsin, Indiana, Delaware, Maryland, Kentucky, Alabama, Louisiana, New Mexico, Arizona, and Arkansas.^[18]

Trends & Forces

Falling Housing Starts Hurts VMC's Aggregates Business

The 2007 housing slump has led homebuilders to dramatically reduce the number of homes they build in 2008. The drop in the number of housing starts has a negative effect on Vulcan because fewer housing starts means less demand for its aggregates, which are used in foundations and driveways. Furthermore, the housing markets of Florida and California, which are two of Vulcan's biggest markets, are among the most affected..

Safety Concerns regarding U.S. Infrastructure benefit VMC

The collapse of the I-35 bridge in Minneapolis in August, 2007 brought attention the United States' ailing highway system and infrastructure. As early as 2005, American infrastructure was receiving poor reviews from engineers.^[19] It is possible that, in light of public reaction and concern over infrastructure safety, federal or state governments could increase spending on infrastructure reparation.

Florida Rock Acquisition Adds Reserves and Geographical Positioning

Vulcan's acquisition of Florida Rock increased Vulcan's reserves by almost 20%. Arguably more important, however, is the expansion of VMCs geographic presence. The company's strategy is to do business in states with populations and metropolitan areas expanding more quickly than the national average, so that demand for their products grows correspondingly fast. The acquisition of Florida Rock gives Vulcan much greater access to markets in the southeastern and southern United States; both of these areas are growing more quickly than the national average. Vulcan's sales will benefit from these fast-growing areas.

Energy Costs Affect VMC's Business on Multiple Levels

Vulcan requires significant amounts of electricity , diesel, and natural gas in the production of construction materials - both in mining raw materials from quarries, and in processing products like asphalt mix and cement.. As such, increasing energy costs have already lowered gross profit, and continue to pose a threat to the company's margins.^[20] Furthermore, rising energy costs also increases the expense of transporting the company's products to market via truck, train, or ship.

Competition

Competitors

• La Farge North America
• Martin Marietta Materials (MLM)
• Texas Industries (TXI)

Although Vulcan is the largest construction aggregates company in the United States, the market for its products is highly competitive, including competition for price, service and product performance. The company estimates that the 10 largest aggregates producers in the United States supply about 35% to 40% of the national market.^[23] There are, however, a large number of smaller, independent producers, which means that in any given market Vulcan may be competing with large regional and small local producers. As mentioned above, the high weight-to value ratio of aggregates makes long distance transport expensive, so both proximity to the market and transportation costs are important factors for market delivery. Vulcan maintains production facilities near rail lines and waterways, which increases the number of markets the company's products can reach.

Market Share

By the company's own estimate, having acquired Florida Rock Industries, Vulcan Materials Company has a market share of around 9% in the construction aggregates industry. ^[24]

References

1. ↑ SEC Vulcan Materials Company 10-K, pg. 5
2. ↑ SEC Vulcan Materials Company 10-K, pg. 24
3. ↑ Morningstar Report, 9-25-2007
4. ↑ SEC Vulcan Materials Company 10-K, pg. 22
5. ↑ SEC Vulcan Materials Company 10-K, pg. 22
6. ↑ Vulcan Materials Company 2007 Annual Report
7. ↑ SEC Vulcan Materials Company 10-K, pg. 22
8. ↑ SEC Vulcan Materials Company 10-K, pg. 22
9. ↑ SEC Vulcan Materials Company 10-K, pg. 22
10. ↑ SEC Vulcan Materials Company 10-K, pg. 22
11. ↑ SEC Vulcan Materials Company 10-K, pg. 69
12. ↑ SEC Vulcan Materials Company 10-K, pg. 5
13. ↑ SEC Vulcan Materials Company 10-K, pg. 5
14. ↑ SEC Vulcan Materials Company 10-K, pg. 5
15. ↑ SEC Vulcan Materials Company 10-K, pg. 5
16. ↑ SEC Vulcan Materials Company 10-K, pg. 5
17. ↑ SEC Vulcan Material Company 10-K
18. ↑ Vulcan Material Company 2007 Annual Report, pg. 18
19. ↑ MSNBC "Crumbling nation? U.S. infrastructure gets a 'D'," March 9, 2005.
20. ↑ SEC Vulcan Materials Company 10-K, pg.24
21. ↑ SEC Martin Marietta, Inc. 10-K, pg. 9
22. ↑ SEC Martin Marietta Materials, Inc. 10-K, pg. 25
23. ↑ SEC Vulcan Materials Company 10-K, pg. 6
24. ↑ SECinfo.com, Vulcan Materials Company, Filing 425, February 20, 2007