Vulcan Earnings: Pricing Gains Buffer Effect of Declining Shipments Amid Private-Sector Slowdown

Narrow-moat-rated Vulcan Materials VMC reported strong first-quarter results that included robust pricing gains and a moderate pullback in shipments. Revenue increased 7% year over year, largely driven by robust growth in the aggregates business. Gross margin expanded 90 basis points year over year to 18.3% as higher raw material costs were offset by higher selling prices. End-market demand remained mixed as pullbacks in residential construction were met with somewhat stable nonresidential demand while public spending made sequential improvements. We’ve increased our fair value estimate to $146 per share from $145 due to the time value of money.

Vulcan’s aggregates business posted strong results, with revenue up more than 15% year over year as a 20% increase in freight-adjusted selling prices more than offset a 2% decline in shipments. Vulcan continues to push through higher prices and expects additional midyear price increases in a majority of its markets. Demand held up well, considering the current construction environment, with incremental growth in public-sector spending relieving some pressure. Nevertheless, new residential housing starts continued to fall, and management noted additional signs of private-sector demand moderating. While infrastructure spending will relieve some pressure on shipments over the next few years, a prolonged pullback in Vulcan’s private-sector end markets could constrain growth.

Management raised its full-year revenue and net earnings guidance, largely due to the strong performance and pricing gains in its aggregates business. This guidance seems achievable to us, given a somewhat stable outlook for nonresidential and subsequent progress in public-sector spending. Midyear price increases should also provide an additional avenue for growth, but Vulcan faces near-term headwinds. While strong public-sector spending could offset a pullback in private-sector demand, it is unclear if spending will ramp up quickly enough to stem the effects.