Aggregate Pricing And IIJA Demand Will Deliver Operational Resilience

Key Takeaways

• Strategic acquisitions and operational efficiencies are enhancing earnings, margins, and shareholder value, supporting sustained growth in return on invested capital and EPS.
  
• Strong pricing in aggregates and public construction demand help drive revenue growth, offsetting challenges in the private sector.
  
• Macroeconomic volatility and interest rate dynamics present challenges to revenue and earnings through impacts on demand, construction activity, costs, and competitive pricing.

Catalysts

Produces and supplies construction aggregates in the United States.

• Vulcan Materials' growth strategy involves improving earnings through both organic business profitability and strategic acquisitions. This should positively impact earnings and EBITDA margins.
  
• The company is benefiting from strong pricing in aggregates, with a 7% year-over-year price increase and mix-adjusted price growth of 8.5%, which should enhance revenue and cash gross profit per ton.
  
• The company's operational focus on plant efficiencies and cost management, including moderating inflationary pressures and cost timing benefits, has led to a decline in unit cash cost of sales, positively impacting net margins.
  
• Growth in public construction demand, driven by infrastructure spending such as the IIJA, should provide a consistent revenue stream and offset private sector challenges, supporting future revenue growth.
  
• Vulcan Materials’ consistent cash flow and disciplined capital allocation, which includes significant strategic acquisitions and strategic growth opportunities, are expected to sustain return on invested capital and shareholder value, benefiting earnings and EPS growth.

Vulcan Materials Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Vulcan Materials's revenue will grow by 8.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 12.6% today to 15.7% in 3 years time.
• Analysts expect earnings to reach $1.5 billion (and earnings per share of $11.4) by about July 2028, up from $944.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.3x on those 2028 earnings, down from 38.3x today. This future PE is greater than the current PE for the US Basic Materials industry at 20.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.2%, as per the Simply Wall St company report.

Vulcan Materials Future Earnings Per Share Growth

Risks

• Increasing macroeconomic volatility and unpredictable interest rates could negatively impact private demand, affecting revenue and net earnings.
  
• Affordability issues and elevated interest rates are headwinds to residential construction, which may result in reduced volumes and impact revenue and profit margins.
  
• There is ongoing uncertainty in the timing of recovery in private nonresidential demand due to interest rates and macroeconomic factors, potentially jeopardizing revenue.
  
• Tariff-related inflationary pressures could increase operating costs, thus impacting net margins, despite the company's belief of no material effect on earnings.
  
• Competitive pressures and market dynamics in local operating markets may affect pricing strategies, which could ultimately influence revenue growth and earnings potential.

Valuation

• The analysts have a consensus price target of $298.523 for Vulcan Materials based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $340.0, and the most bearish reporting a price target of just $188.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $9.6 billion, earnings will come to $1.5 billion, and it would be trading on a PE ratio of 32.3x, assuming you use a discount rate of 7.2%.
• Given the current share price of $273.92, the analyst price target of $298.52 is 8.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.