Vulcan Materials Company

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 3/5

Vulcan Materials Company is a leading producer of construction aggregates, primarily crushed stone, sand and gravel, and asphalt mix, using these materials to manufacture and distribute its products for various infrastructure, commercial, and residential projects.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Vulcan Materials Company (VMC) is a dominant player in the aggregates industry, controlling 7 percent of the market with 376 active quarries, which are difficult to replicate and creates barriers to entry, providing it with a competitive advantage. This is the main moat of the company.

Business Overview and Competitive Landscape:

  • Revenue Distribution: VMC’s revenue streams are primarily from the sales of its aggregates (crushed stone, sand, and gravel), asphalt mix, and associated services. These products are essential for construction projects, particularly infrastructure like roads, highways, bridges, and airports.
  • Industry Trends:
    • The construction aggregates industry is highly localized, given the high costs of transporting these heavy materials. This localization gives a geographical advantage to companies like VMC that are well established in their regions.
    • The industry is also highly cyclical, influenced by infrastructure spending cycles, public policy, and, to some extent, by residential construction trends.
    • The industry is consolidating, with a few larger players acquiring smaller ones.

Infrastructure spending has become a hot topic, and the passing of the Bipartisan Infrastructure Law (BIL) in 2021 should provide a boost to the sector. However, it could have a delayed effect on revenue. * Increased investment in infrastructure is a global trend, with many countries prioritizing investments in roads, railways, and water systems.

  • Competitive Landscape: The aggregates market is fragmented, with no single company having a dominant position. The top players include VMC, Martin Marietta, and LafargeHolcim. Competition is often based on price, proximity to project sites, and the ability to supply quality materials consistently.
  • What Makes VMC Different:

VMC stands out through its extensive distribution network, with 376 active quarries, strategic locations near key markets, and its capability to produce a wide array of aggregate products. Vertical integration provides an advantage, though the real strength is in its geographical reach. Management is highly focused on increasing profitability and ROIC.

  • VMC’s management emphasizes their commitment to generating value through operational improvements and disciplined capital allocation. It has streamlined costs, enhanced pricing, and increased its focus on areas that have a higher potential for profitability.

Financials In-Depth:

  • Overall Performance: The company’s financial performance has been highly sensitive to the state of the economy and governmental investment in infrastructure and also affected by unusual weather patterns and supply chain issues. The company performed admirably in the first half of 2022, but then had major setbacks in the second half of the year, caused by inflationary pressures and labor shortages. In 2023, the company has been regaining some stability.
  • Revenues: VMC’s revenue is mainly driven by its Aggregates segment with some contribution from Asphalt, Concrete, and Calcium segments. The company’s revenues showed marked improvement in 2022, with some minor declines in the first quarter of 2023.
  • Margins: EBITDA margins vary. On the whole, the company is achieving more sales at increased margins over the last couple of years by optimizing pricing and making internal operational efficiency improvements.

During periods of inflation, input costs for companies such as Vulcan tends to increase, while it can also pass through prices onto customers. But this process of increasing prices may take time, and can compress margins temporarily. The ability of a company to pass through costs is a sign of a moat.

  • Return on Invested Capital (ROIC): VMC’s ROIC has been fluctuating around 10% over the last 5 years. While this return is not the most impressive, it does meet the standard ROIC that is needed to determine a moat. It’s also important to look into the industry average ROIC to find out the difference between peer companies.
  • Balance Sheet: VMC has substantial debt. As of the latest quarter, the net debt-to-adjusted EBITDA ratio was 2.6x. While the current ratio is around 2, which indicates a reasonable ability to pay off debts, this still means that the company is susceptible to market risk. VMC’s ability to manage debt and to avoid issues such as high interest rates becomes more pressing in the future. A higher debt load also means that acquisitions could burden the company further.
  • Cash Flows: Although the company is investing heavily, it has been consistently able to generate positive free cash flow from its operations. The increased revenue and profit margins have helped here. The cash flow can enable further acquisitions and capital investments.
  • Debt Considerations: VMC has taken steps to lower its cost of debt with lower rate debt issuance and debt repayment. However, an economic downturn could still leave the company with a higher cost of capital in the future.

Risks to the Moat and Business Resilience

The major risks to the company’s moat include the potential failure to pass through costs and to keep the cost of capital below their ROIC. Inability to obtain proper regulatory approvals or changes in regulations could also impact its profitability. The company’s business is cyclical and highly related to public and private construction spending and can fluctuate with those cycles. These factors could all negatively impact the company’s long-term outlook.

Understandability: 2 / 5

While the company’s main business of producing aggregates is easy to grasp, its operations and the impact of various government regulations, taxes, and accounting peculiarities complicate the overall understanding. Furthermore, determining how much the business is worth is a somewhat complex process and hard to accurately predict. Understanding the nuances of the construction industry, including supply chains, labor costs, and infrastructure funding dynamics, requires some effort and knowledge that goes beyond basic company operations. Finally, the company has a highly levered balance sheet.

Balance Sheet Health: 3 / 5

While the company’s assets are greater than its liabilities, the company’s high debt load of over 5 billion dollars and also its high liabilities to assets are noteworthy. The company is also dependent on stable rates in the debt market, as increased rates may cause higher expenses. This pushes the balance sheet health from the top tier to a lower one. However, as seen previously, the company is able to generate positive free cash flows from its operating activities and they have a clear plan of deleveraging their balance sheet, meaning they will lower their debts in the coming years.

Recent Concerns / Controversies and Management Response:

During the latest earnings calls, the management of VMC acknowledged some of the challenges that the business is facing. They explained the impact of higher energy prices, labor shortages, and weather anomalies on the company’s ability to maintain profitability and growth. Supply chain bottlenecks were also impacting production. All these factors had the greatest effects on the company’s second half performance in 2022, with the first half being relatively strong. However, the management also reiterated their focus on their long-term strategy with continued investments in infrastructure. They also acknowledged the need to adjust prices in reaction to changing market and industry conditions. Finally, management noted their belief that the economy would be able to avoid a recession, meaning that infrastructure spending in the future would continue to be at least stable. Also the Bipartisan Infrastructure Law is expected to provide a boost in the coming years, though that will depend on implementation. Management also addressed shareholders and acknowledged that debt levels were a point of consideration for them. They highlighted that they are committed to lowering debt and interest expenses. Finally, management has reiterated their commitment to increase profitability through operational efficiencies and strategic pricing.