Acquisitions And IIJA Legislation Will Unlock New Market Opportunities

Key Takeaways

• Strategic acquisitions and increased public construction funding are set to significantly boost revenue growth and earnings.
  
• Improved efficiencies and cost control are enhancing margins, with a strong pricing environment expected to drive higher profitability.
  
• Inflationary pressures, rising wages, and sector slowdowns threaten Vulcan Materials' margins and revenue growth amidst government policy uncertainties and potential weather disruptions.

Catalysts

Produces and supplies construction aggregates in the United States.

• Vulcan Materials has deployed over $2 billion towards strategic acquisitions, expanding their presence into new growth areas, which is expected to significantly contribute to revenue growth and earnings in 2025.
  
• The company anticipates a strong pricing environment where freight-adjusted aggregate prices are expected to grow between 5% and 7% in 2025, which should positively impact net margins through enhanced pricing power.
  
• There is a projected increase in public construction activity driven by $45 billion in newly passed funding initiatives and continued IIJA-related spending, which supports the outlook for an increase in aggregate shipments of between 3% and 5%, directly boosting revenue.
  
• The consistent execution of the Vulcan Way of operating has led to improved efficiencies and cost management, translating to a low to mid-single-digit increase in freight-adjusted aggregates unit cash cost, contributing to higher EBITDA margins.
  
• With recent acquisitions contributing approximately $150 million of adjusted EBITDA and expected expansion in cash unit profitability across segments, Vulcan Materials forecasts attractive growth in adjusted EBITDA for 2025, strengthening overall earnings.

Vulcan Materials Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Vulcan Materials compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Vulcan Materials's revenue will grow by 12.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 12.4% today to 14.7% in 3 years time.
• The bullish analysts expect earnings to reach $1.5 billion (and earnings per share of $11.52) by about April 2028, up from $919.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 35.2x on those 2028 earnings, up from 34.6x today. This future PE is greater than the current PE for the US Basic Materials industry at 15.9x.
• Analysts expect the number of shares outstanding to decline by 0.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.12%, as per the Simply Wall St company report.

Vulcan Materials Future Earnings Per Share Growth

Risks

• Inflationary cost pressures and rising wages, which are predicted to increase by mid-single digits, could negatively impact Vulcan Materials' net margins and profit growth.
  
• The slowdown in private nonresidential construction activity, coupled with the expectation of continued contraction in this sector for 2025, may adversely affect Vulcan's revenue projections.
  
• The company faces headwinds in residential construction due to elevated interest rates and affordability issues, which could lead to declines in related shipments and revenues.
  
• Risks associated with flat or declining aggregate shipments and the impact of weather disruptions could challenge sales volumes and overall revenue growth projections.
  
• Uncertainty around the pace and impact of government policies, particularly concerning infrastructure spending and tariffs, could impact public demand forecasts and consequently, future revenue streams.

Valuation

• The assumed bullish price target for Vulcan Materials is $335.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Vulcan Materials's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $335.0, and the most bearish reporting a price target of just $184.78.
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be $10.4 billion, earnings will come to $1.5 billion, and it would be trading on a PE ratio of 35.2x, assuming you use a discount rate of 7.1%.
• Given the current share price of $240.57, the bullish analyst price target of $335.0 is 28.2% higher.
• 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.