We See Clouds Clearing for This Construction Holding
But near-term short-covering and growing risk the Fed does less than expected have use holding steady on the shares.
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Vulcan Materials VMC reported quarterly revenue and earnings per share this morning that were hurt by severe weather. Revenue was flat year over year due to lower shipment volumes, but the trend of improving freight-adjusted sales price per ton continued. This tells us that despite the bad weather that hit volumes during the quarter, pricing remains favorable. In addition, in 2025 Vulcan sees pricing further improving, with aggregate pricing up high-single digits year over year.
The pricing outlook will help drive better margins in the coming quarters as Vulcan’s shipment volumes rebound and benefit from continued infrastructure spending and improving housing construction, as the Fed eventually gets monetary policy back to neutral footing. Bolstering this view was news this morning that competitor Martin Marietta MLM was hurt by severe weather, but that its outlook sees record levels of federal and state investments in highways, streets, and bridges benefiting 2025. In addition, the White House said this week that $3 billion from the Inflation Reduction Act has been earmarked to strengthen port infrastructure as well as continued data center construction.
While many of us are likely to view the recent hurricanes as a bump in the road that could add incremental demand for Vulcan amid rebuilding efforts, we’re likely to see some short-covering help prop up VMC shares this morning. Folks with short-term time spans likely expected a more disastrous quarter report from Vulcan, chalking it up to severe weather. Short interest coming into Vulcan’s earnings report stood near 1.5 million shares, which equates to 1.79 days to cover and helps explain the post-earnings pop we’re seeing in the shares.
What those short sellers probably did not consider was the favorable pricing environment and disciplined management at Vulcan. The company’s adjusted earnings before interest, taxes, depreciation, and amortization margin rose to 29.0% in the September-ending quarter from 27.6% in the year-ago one, despite the 8% drop in revenue. Looking at Martin Marietta's results, we see a much different picture with its adjusted EBITDA falling faster than its September-ending quarter revenue.
With better prospects ahead we will remain owners of VMC shares but for now, we will leave our VMC price target at $300, while others on Wall Street catch their targets up to ours. Ahead of the company’s earnings call this morning, the consensus VMC price target is $276. Based on the stickiness of 2025 pricing and its impact on margins, we will revisit our VMC price target.
We’re Waiting for Friday’s Jobs Report, Fed Meeting
While we continue to rate VMC shares a "One," we would not chase the shares today, given the likely short-covering and increasing probability the Fed could deliver less than two additional rate cuts before the end of this year. We’ve talked about the strength of the economy and what we saw in the October Flash PMI, but now we can add this morning’s far stronger October ADP employment report that showed 233,000 jobs added during the month. That was well ahead of the 114,000 consensus and the upwardly revised September figure of 159,000.
That suggests we are likely to see a much stronger October jobs report compared with the market consensus of 115,000 nonfarm jobs. If that is the delivered outcome, it will likely result in another revision to rate-cut expectations, which could weigh on the shares of interest-rate sensitive companies like Vulcan but also Builders FirstSource BLDR, United Rentals URI, and to a lesser extent Eaton ETN.
Recognizing this, our plan will be to look for better pick points for those shares as we navigate this week’s economic data and next week’s Fed policy decision. Should those opportunities present themselves, we would have no problem owning more shares of those companies in the portfolio heading into 2025.
