We maintained our Neutral rating on Vulcan Materials Corp. (VMC) following appraisal of fourth quarter and full year 2011 results.
Vulcan Materials incurred a narrower loss of 14 cents per share in the fourth quarter of 2011 compared with a loss of 36 cents per share in the same quarter of 2010 (excluding special items) and the Zacks Consensus Estimate of a loss of 37 cents per share. Improved top line and gross margins led to the curtailed loss in the quarter. Total revenue in the quarter rose 5% to $614.6 million driven by meaningful gains in the Aggregates segment. Revenue was higher than the Zacks Consensus Estimate of $573 million. Gross margins improved 360 basis points due to strong margins in the Aggregate segment.
We are encouraged by the company’s better-than-forecast results, in particular the impressive performance at the Aggregates segment, which is slowly gaining momentum. Vulcan is the largest producer of construction aggregates in the US. The Aggregates business, which accounts for the lion’s share of the company’s revenue, recorded growth of 5% in the fourth quarter of 2011, driven by increased volume and pricing. Segment gross profit rose 37% in the quarter led by revenue growth and improved productivity. Management also projects a much improved earnings in this segment in 2012.
We also like the company’s cost reduction initiatives. In 2011, the company’s restructuring initiatives yielded $55 million in savings. These efforts have resulted in substantial reductions in selling and general expenses. In February 2012, the company announced two other initiatives, a Profit Enhancement Plan (PEP) and planned asset sales, in order to improve earnings and cash flows, pay off debts and thereby strengthen its overall credit profile. The PEP plan is designed to reduce costs as well as enhance profitability by streamlining the management structure over the next 18 months. The plan is expected to improve EBITDA by $100 million on an annual basis by 2014. Under the planned asset sale, the company looks to divest its non-core assets over a period of 12 to 18 months in order to improve its liquidity position and earnings. These sales are expected to generate after-tax net proceeds of $500 million. Though these initiatives will hurt the company’s earnings in the near term they will improve the company’s overall growth profile in the long term.
Vulcan serves both the private and public sectors. Public construction projects, such as bridges, dams and roads, comprise more than half of Vulcan’s businesses. In 2011, publicly funded construction accounted for approximately 55% of total aggregates shipments. Generally public sector spending is much more stable than the private sector and is less affected by general economic cycles.
Though public construction spending remains stable, low levels of growth in the private sector, both in residential and non-residential construction, are still a concern. Though contract awards in the manufacturing sector and new projects in the categories of retail and office buildings have grown in the past year, lack of sustainable growth in employment and in business investment and lending activity has kept the recovery in non-residential construction activity under a leash.
Besides, rising costs of energy and other raw materials as well as the company’s high debt load keep us on the sidelines.
VULCAN MATLS CO (VMC): Free Stock Analysis Report
