Expect cement and rock stocks to bounce

  • By Avi Salzman,
  • Barron's
  • Investing in Stocks
  • Stocks
  • Investing in Stocks
  • Stocks
  • Investing in Stocks
  • Stocks
  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print

In a robust economy, companies that mine and mix the base materials for new roads and buildings ought to be thriving. But the stocks of the main players in the cement and rock-mining industry have tumbled this year, with several dropping more than 20%.

A combination of bad weather and political gridlock has weighed heavily on the industry.

The latest challenge comes from Hurricane Florence, which is expected to flood quarries throughout the Southeast and delay building projects. Several stocks in the sector fell sharply on Monday after storm forecasts worsened; Denver-based Summit Materials (SUM) tumbled 7.9%. About a third of Summit’s revenue is in areas vulnerable to bad weather this quarter, a Deutsche Banknote says.

Don’t expect the stock slump to last, however. Absent a recession, companies in this industry tend to have strong pricing power and should benefit as cities and states shore up crumbling infrastructure.

Companies like Summit, whose forward price/earnings ratio of 14 is near its lowest level since its 2015 initial public offering, should eventually catch Wall Street’s eye again. At its average forward P/E multiple of about 19 times, it would be worth 25% more than today.

“The stocks are going down on weather issues; it’s not like they’re losing that business, it’s delayed,” says Craig Hodges, chief executive of Hodges Capital Management, a Dallas-based investment firm that owns shares of U.S. Concrete (USCR) and Eagle Materials (EXP), a company that makes cement and has a separate wallboard business.

The heavy-materials industry—producers of cement, concrete, asphalt, and so-called aggregates like gravel, sand, and stone—is worth about $100 billion in the U.S. The companies that mine aggregates, the building blocks of most of the other products, tend to enjoy monopolylike power on the local level. It’s difficult for new entrants to win approval for mines or gravel pits, particularly near highly populated areas, so incumbents enjoy wide advantages. The bigger companies, like Martin Marietta Materials (MLM), Vulcan Materials (VMC), and Summit, have been able to buy up smaller competitors. It doesn’t make economic sense to truck gravel more than 75 miles, so companies with local monopolies have wide latitude to raise prices.

Cement, a mix of stone and other substances that’s been subjected to high heat, is somewhat easier to transport, including by boat. As a result, it’s a business with fewer barriers to entry. Among the biggest cement companies operating in the U.S. are Ireland-based CRH (CRH) and Mexico’s Cemex (CX). (Concrete is the product of aggregates, cement, and water.)

A closer look at fertilizer stocks

After solid quarterly results, here are three stocks you may want to watch.

Heavy-materials companies benefit from new home-building and office construction, but they make even more from major highway and bridge projects, which use a higher percentage of their products. And people who are bullish on the industry tend to be bullish on the potential for new public-works projects.

The bulls were particularly optimistic when President Donald Trump was elected, because one of his signature goals was to pass an infrastructure plan worth $1.5 trillion. The stocks spiked the day after the election, but the infrastructure plan has floundered since. Hodges is optimistic that it will surface again, particularly if the Democrats retake the House of Representatives, because “this is a bipartisan issue,” he says.

Analysts are more skeptical. “That optimism is kind of gone,” Morningstar analyst Kristoffer Inton says. Nonetheless, he expects public infrastructure investment to rise considerably. “When you look at road-quality nationwide, it’s still deteriorating. Eventually there has to be a way for additional funding to come, and that will justify the actual earnings growth that the stocks were previously pricing in.”

States are already stepping in. New Jersey, which in 2016 approved its first gas-tax increase in decades, has another increase coming next month as part of its plan to raise $2 billion a year for transportation projects. The California legislature approved a $52 billion spending plan last year to shore up the state’s roads and transportation infrastructure.

That plan is one reason Barclays analyst Adam Seiden likes Vulcan, which does more business in California than its competitors. The company is also active in Houston, which is still rebuilding from Hurricane Harvey and is benefiting from growth in the oil and gas sector. The stock is more expensive than competitors on a P/E basis, but remains well below its historical averages. Seiden thinks it could rise to $138 from a recent $110.

U.S. Concrete also operates in California, as well as metropolitan New York, where it’s helping renovate LaGuardia Airport. The stock has come under fire from short-seller Spruce Point Capital Management, which questioned the company’s accounting this year. In an interview, CEO Bill Sandbrook dismissed the concerns raised in that report.

U.S. Concrete responded to a request for documents from the Securities and Exchange Commission, but the company says that it has had “no further communication with any agency related to this since the information was provided in early 2017 and was determined nonmaterial.” The company did not provide more detail on the nature of the inquiry, and the SEC declined to comment.

Inton of Morningstar sees “little justification for its significant price decline in absolute terms or relative to its peers,” and thinks its fair value is $75, compared with its recent price of $49.

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print

For more news you can use to help guide your financial life, visit our Insights page.


Copyright © 2018 Dow Jones & Company, Inc. All Rights Reserved.
Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.
close
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.
close

Your e-mail has been sent.