The harsh reality is that infrastructure here in the United States is in bad shape. The overall grade given by the ASCE (American Society of Civil Engineers) in 2021 was a C-, and many sub-sectors were even worse: aviation, D+; dams, D; hazardous waste, D+; inland waterways, D+; levees, D; parks and recreation, D+; storm water, D; transit, D-; wastewater, D+; and roads, D.
Numbers published by the White House state that one in five miles of our highways and major roads, as well as 45,000 bridges, are in poor condition. I live in western Pennsylvania, where we saw the Fern Hollow Bridge Collapse in 2022.
This is why the government has allocated trillions of dollars in federal funding towards upgrading U.S. infrastructure over the past few years. While this spending is good for the country, it will be great for the companies that supply construction materials.
Vulcan and Infrastructure Spending
One such company is the aggregates and concrete giant Vulcan Materials (VMC). The company is the nation's largest supplier of construction aggregates (primarily crushed stone, sand, and gravel) and a major producer of asphalt mix and ready-mixed concrete. It owns over 350 aggregate facilities.
Vulcan was founded in 1909 as the Birmingham Slag Company. It turned slag - the by-product of steel manufacturing - into construction materials. It grew rapidly during the post-WWII construction boom, and in 1956, it was rebranded as Vulcan Materials.
After a foray into the production of chemicals, Vulcan once again focused fully on aggregates. In 2007, it bought Florida Rock for $4.2 billion; in 2017, it purchased Aggregate USA for $900 million; and then it acquired US Concrete for $1.3 billion in 2021.
The company today seems to have an almost Buffett-like moat. While end market demand was largely flat for most of 2023, robust price growth across Vulcan’s entire portfolio drove solid financial results.
Full-year 2023 sales were up 6.5% from the year before. But consolidated gross margins in the fourth quarter expanded more than 500 basis points to 25.7%, largely due to contributions from Vulcan’s aggregates and asphalt businesses. Its aggregate business ended 2023 on high note, as the company continued to push through higher selling prices.
Net sales rose 12% in the fourth quarter from a year ago, largely due to a 14% increase in freight-adjusted selling prices. And over a two-year period, aggregates prices are up by almost 30%. Moderating costs and higher selling prices continued to bear fruit for Vulcan’s aggregate business, with segment gross margin in the fourth quarter expanding 400 basis points to 30%.
No wonder, then, that Vulcan’s overall operating margin expanded by 3.8 percentage points to 18.1% in 2023, according to FactSet. And there’s more to come. Management expects prices to rise between 10% and 12% in 2024.
In February, Vulcan CEO J. Thomas Hill said that demand has accelerated in 2024, with trailing 12-month highway starts now surpassing $100 billion. This surge was driven by the U.S. government’s push to improve infrastructure.
In 2019, a transportation infrastructure bill was passed, earmarking $287 billion for highways over the next five years. This was followed in 2021 by the much larger Infrastructure Investment and Jobs Act, which unlocked $1.2 trillion in federal funding to be spent over the next decade. Part of its focus is on repairing and rebuilding roads.
These government programs will boost the company’s fortunes. Aggregates account for over 75% of Vulcan's consolidated revenue and an even larger portion of its gross profits.
Buy VMC Stock
The federal infrastructure funding should be a meaningful demand catalyst for several years, with strong incremental demand starting in 2024. I also like Vulcan’s leading position in the fastest-growing regions of the U.S.
It should not come as a shock that a company with pricing power, strong cash generation and exposure to U.S. government subsidies, isn’t priced cheap. Vulcan’s stock trades on a forward price/earnings ratio of 29, which is a bit ahead of its peer - Martin Marietta (MLM) - and its multiple of 27 times.
But given its strong growth prospects, Vulcan’s valuation is actually rather attractive. In 2026, forecasts are that the company’s earnings per share will reach $10.90, up 55% from the $7 per share it made last year. These numbers have been consistently upgraded throughout the past year. I strongly suspect this forecast will be upgraded again.
For the U.S. to rejuvenate both its infrastructure and its industrial sector, it will need a lot of aggregate material. This will translate to continued growth in Vulcan Materials’ earnings and operating cash flow over the next decade - a trait that should always be highly valued.
Buy VMC stock below $266.
