Vulcan Earnings: Robust Pricing Provides Room for Margin Expansion, but Shares Remain Pricey

Narrow-moat-rated Vulcan Materials VMC reported strong second-quarter results, with net sales increasing 8% year over year amid steady end-market demand. Consolidated gross margins expanded almost 500 basis points versus a year ago to 27.6% because of strong pricing gains in its aggregates business. Despite a slowdown in residential housing starts, nonresidential construction has remained strong, while Vulcan has been able to raise prices for its materials at an impressive pace. We expect Vulcan’s robust pricing will offset potential volume headwinds in the second half of the year. As such, we’ve increased our fair value estimate to $154 per share from $146 due to higher near-term revenue and profitability in our forecast.

In Vulcan’s aggregates business, a 1% decline in shipments was more than offset by a 15% increase in freight-adjusted selling prices, leading to a nearly 13% increase in revenue year over year. Additionally, segment gross margins expanded almost 300 basis points from a year ago to 31.6% as Vulcan continues to push through price increases. The recent pullback in residential construction has been largely offset by nonresidential projects, which have buoyed shipments for the segment for much of the year. While these projects will likely slow over the next year, potential infrastructure spending could help offset this decline.

Despite strength across Vulcan’s portfolio, infrastructure spending has yet to materialize into robust shipment growth. Much of Vulcan’s shipments have been buoyed by better-than-expected residential and nonresidential demand. We maintain our view that infrastructure spending will be a slow process rather than an immediate spending spree, and Vulcan will reap the benefits over the coming years, not quarters. While we remain confident in Vulcan’s long-term growth prospects, near-term pressures in private-sector spending and slower-than-expected spending of infrastructure funds could weigh on results.