Strong demand stemming from U.S. housing market rebound will benefit the companies under the Zacks Building Products - Concrete & Aggregates industry. Also, a significant boost in infrastructural and public construction spending should continue to favor the industry.
Indeed, coronavirus-led restrictions, softness in non-residential construction activity, weather-related woes and higher labor cost are eating into the industry players’ margins. Nonetheless, prominent companies in the industry like U.S. Concrete, Inc. (USCR), Eagle Materials Inc. (EXP), Martin Marietta Materials, Inc. (MLM), Forterra, Inc. (FRTA) and Vulcan Materials Company (VMC) have been gaining from the positives.
Industry Description
The Zacks Building Products - Concrete & Aggregates industry consists of manufacturers, distributors and sellers of construction materials like aggregates, concrete, along with other related items. The materials also include gypsum wallboard, recycled paperboard, concrete blocks, ready-mix concrete, and oil and gas proppants.
4 Trends Shaping the Future of Heavy Construction Industry
Housing Sector Rebound & Funding to Aid Highway and Intermodal Projects: Housing market rebound and focus on enhancing the country’s infrastructure by upgrading highways, railroads, bridges, and broadband are expected to be key catalysts for the industry. Solid housing market conditions in the United States backed by rising need for more work-at-home space and record-low mortgage rates are expected to be a major tailwind for the industry participants.
The industry is also poised to benefit from modest growth in public sector construction activity — mainly in transportation projects — and contract work for highways, as well as strong pricing. Currently, the Highway Trust Fund (“HTF”) is afloat on a one-year continuing resolution passed at September-end. The U.S. House passed a legislation that injects $13.6 billion into HTF, while extending the FAST Act within a year at current funding levels. The FAST — Fixing America’s Surface Transportation — Act, which was scheduled to expire on Oct 1, 2020, will now run through Oct 1, 2021.
Acquisitions & Focus on Operating Efficiency: The industry participants follow a well chalked-out acquisition plan to enhance domestic and international portfolios. Meanwhile, companies are increasingly focusing on reducing controllable costs and maximizing operating efficiency across business lines to generate higher earnings, as well as cash flow.
Coronavirus-Related Woes & Weakness in Non-Residential: The coronavirus pandemic-related disruptions will weigh on the companies’ near-term results. The biggest headwinds for the industry players are centered around governmental permits and these may have an impact on project schedules.
In contrast to the signs of a sharp recovery in residential, non-residential construction indicators remained weak through 2020, with commercial/industrial end markets being the primary reason for the persistent weakness.
Shortage of Skilled Labors, Fluctuation in Input Prices & Weather Woes: The industry players are struggling with shortage of skilled laborers, rising wage costs and escalating material expenses. The companies use electricity, diesel fuel, liquid asphalt and other petroleum-based resources. Hence, supply-related woes and significant fluctuation in the prices of these resources affect operating results. The businesses are also exposed to weather-related risks that affect production schedules and hence profitability. Excessive rainfall, flooding or severe drought jeopardize shipments and production. The first and fourth quarters are mostly affected by winter. Again, hurricanes in the Atlantic Ocean and Gulf Coast are the most active during these quarters. These impediments may continue to bump up costs and mar profits of the industry participants.
Zacks Industry Rank Indicates Bullish Prospects
The Zacks Building Products - Concrete & Aggregates industry is a 11-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #37, which places it in the top 15% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since December 2020, the industry’s earnings estimates for 2021 and 2022 have been revised 6.7% and 4.6% upward, respectively.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Outperforms Sector & S&P 500
The Zacks Building Products - Concrete & Aggregates industry has outperformed the broader Zacks Construction sector, as well as Zacks S&P 500 composite over the past year.
Stocks in this industry have collectively gained 69.6% versus the broader sector’s growth of 51.2%. Meanwhile, the S&P 500 has climbed 42.5% in the same period.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month price-to-earnings, which is a commonly used multiple for valuing Building Products - Concrete & Aggregates stocks, the industry is currently trading at 23.4X versus the S&P 500’s 22.2X and the sector’s 16.4X.
Over the past five years, the industry has traded as high as 27.5X, as low as 12.9X and at a median of 22.1X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500.jpg)
5 Concrete & Aggregates Stocks to Keep a Close Eye On
U.S. Concrete, Inc.: Based in Euless, TX, this company produces and sells ready-mixed concrete, aggregates, and concrete-related products and services to the construction industry in the United States, U.S. Virgin Islands, as well as Canada. Improved operating efficiencies, increased production volume at its Texas aggregates operations and profits from the Coram Materials acquisition (completed in February 2020) are expected to drive growth. Also, actions taken as part of business contingency plans in the form of labor management, higher asset utilization and delivery efficiencies that include lower fuel costs are proving favorable.
The stock has gained 116.3% over the past six months versus the industry’s 59.4% rally. This Zacks Rank #1 (Strong Buy) company’s 2021 and 2022 earnings are expected to growth 5.6% and 30.7%, respectively. Meanwhile, its 2022 earnings estimates have moved up to $2.94 per share from $2.93 in the past 30 days, reflecting optimism in the company’s earnings growth potential.
Price and Consensus: USCR
Eagle Materials Inc.: This Dallas, TX-based company produces and supplies heavy construction materials, light building materials, and materials used for oil and natural gas extraction in the United States. Improved cement, concrete and aggregates sales volume, as well as solid contributions from the recently-acquired Kosmos Cement Business have been aiding the company. Higher pricing and lower diesel costs are also adding to the positives.
This Zacks Rank #2 (Buy) company’s stock has gained 56.1% in the past six months. Its earnings estimates for fiscal 2021 have moved 5.5% up in the past 30 days. Earnings for fiscal 2021 and 2022 are expected to grow 21.4% and 14.8%, respectively.
Price and Consensus: EXP
Martin Marietta Materials, Inc.: Based in Raleigh, NC, Martin Marietta produces and supplies construction aggregates as well as other heavy building materials — mainly cement — in the United States. With a one-year extension of the FAST Act at current funding levels, state and local governments have the visibility needed to plan, design and award transportation projects through the 2021 construction season. Importantly, estimated fiscal 2021 lettings for its top five DOTs are currently above or near prior-year levels (as of fourth-quarter 2020). Single-family housing strength, expanded infrastructure investment and heavy industrial projects of scale are expected to support near-term shipment levels.
Importantly, this Zacks Rank #2 company has seen 7.7% upward estimate revision for 2021 earnings over the past 30 days. The stock has gained 62.1% in the past six months. Although earnings for 2021 are expected to witness a 2.1% decline, the same for 2022 is likely to grow 13.7%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Forterra, Inc.: Irving, TX-based Forterra is a manufacturer of concrete and clay building products. The company has been benefiting from five improvement pillars: Health and Safety; Plant-Level Operational Discipline; Enhanced Commercial Capabilities; Working Capital Efficiency; and G&A effectiveness.
Importantly, this Zacks Rank #3 (Hold) company has seen 27.5% upward estimate revision for 2021 earnings over the past 30 days. The stock has gained 68.4% in the past six months. Earnings for 2021 and 2022 are expected to grow 38.3% and 15.4%, respectively.
Price and Consensus: FRTA
Vulcan Materials Company: This Birmingham, AL-based company produces and supplies construction aggregates, asphalt mix, as well as ready-mixed concrete. The company’s focus on four strategic initiatives — Commercial Excellence, Operational Excellence, Strategic Sourcing and Logistics Innovation — will enhance price performance and operating efficiencies. Vulcan Materials has been generating higher earnings despite lower revenues on the back of prudent cost-control efforts and increased pricing in aggregates. Its focus on a systematic inorganic strategy for expansion is adding to the positives.
The stock has gained 37.6% over the past six months. Although this Zacks Rank #3 company’s shares have underperformed the industry over the past six months, earnings estimates for 2021 have moved 6% upward in the past 30 days, depicting analysts’ optimism over the stock’s earnings prospects. Meanwhile, earnings for 2021 and 2022 are expected to grow 9.4% and 18.9%, respectively.
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Vulcan Materials Company (VMC): Free Stock Analysis Report
U S Concrete, Inc. (USCR): Free Stock Analysis Report
Martin Marietta Materials, Inc. (MLM): Free Stock Analysis Report
Forterra, Inc. (FRTA): Free Stock Analysis Report
Eagle Materials Inc (EXP): Free Stock Analysis Report
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