Martin Marietta Earnings: Pricing Power Drives Robust Margin Expansion; Shares Remain Expensive

Narrow-moat-rated Martin Marietta MLM reported third-quarter results with few surprises. Net sales rose 10% year over year as the company enjoyed strong pricing amid moderating demand for most of its building materials. Aggregate shipments fared worse in the quarter as Martin Marietta navigates a slowdown in new residential construction that has been somewhat offset by heavy nonresidential and infrastructure demand. We expect shipments to remain pressured through the end of the year, but accelerating infrastructure spending should provide some relief in 2024. We’ve increased our fair value estimate to $325 per share from $323 due to the time value of money.

Martin Marietta’s aggregate business reported solid results despite near-term headwinds. Net sales rose 7.5% year over year, driven by a 20% increase in selling prices that more than offset a 7% decline in shipments in the quarter. Pricing gains continued to drive growth for the aggregates business despite weak new residential construction and softening light nonresidential demand. Gross margin for the segment expanded over 600 basis points from a year ago to an impressive 36% as the company flexed its pricing power. Higher mortgage rates are constraining single- and multi-family housing starts, but we expect incremental growth in infrastructure spending will offset some of this pullback next year. That said, the aggregates business could face significant challenges if higher rates begin to weigh similarly on nonresidential construction in the United States.

The cement business continues to perform well as it experiences robust demand in Texas. Shipments were roughly flat year over year, but average selling prices rose 19% while gross margin expanded to almost 55% in the quarter. The cement business benefited greatly from previously announced price increases, and management has already announced another price increase that will be effective Jan. 1, 2024.