Yes, we recognize that we may be crazy to take a positive stance on Vulcan Materials Co (VMC). as we did several weeks back. Vulcan announced a few days ago that they are cutting 38 jobs as they tighten the belt through this continued economic downturn. Then, yesterday, Vulcan had a heck of a trading day with a $7.38 increase per share or roughly a jump of +18.4%. Not a bad trading day, and it could demonstrate in some ways how the new administration’s plan in the White House to stimulate the economy could benefit a firm like Vulcan.
Vulcan is a construction material supply company. Crushed stone, sand, gravel and similar materials are all the expertise of Vulcan, and the projects they produce are vital to any residential or commercial development. Given the continued correction in housing and construction in general, it is possible that the downturn Vulcan has experienced since its peak in July of 2007 will continue. Their net income for the third quarter of this year was only $59.1 million, compared with $135.4 million for the same period last year.
Tom Carroll, the director of business development and external affairs at Vulcan put it this way, saying, “When you see a downturn in those sectors [housing, etc], it obviously ends up reflecting on your business.”
We don’t disagree with Tom, but we do think that perhaps the message beginning to permeate through the market from the new Obama administration could signal a turn in Vulcan’s prospects. Just yesterday, President-elect Obama outlined an aggressive stimulus plan to create jobs and stimulate the economy. He very quickly outlined a list of items that he wants to enact including the creation of 2.5 million jobs, with spending specifically on roads, bridges, schools, and clean energy programs. It’s that last part that could really open the door for Vulcan Materials. As an active materials supplier in more than 20 states, this company has the expansive resources and product set to really benefit as spending on infrastructure grows.
Vulcan Materials currently receives a rating of Greatly Undervalued from Ockham. We base that on our historical sales, cash, and dividend models for Vulcan. If we just focus on the Cash Earnings analysis we can begin to understand that for VMC, the current level of Cash Earnings compared to its historical levels helps identify where VMC is in relation to what the investing community was willing to pay for this level of Cash Earnings in the past. Currently, Vulcan’s Price to Cash Earnings ratio is 5.35. That is roughly 51% below where the average of the Price to Cash Earnings range would be for Vulcan over the last decade. Now we’re not saying that a decline in the stock price wasn’t (or isn’t) justified, but if you look at our price chart and ratings history, we were pretty negative on VMC when it was far above these levels. So we’re certainly not illogical about Vulcan, as many of our investment banking research brethren have been in the past.