Vulcan Earnings: Strong Pricing Gains Offset Residential Construction Slump

Vulcan Materials VMC reported third-quarter results that were largely in line with our expectations. Net sales rose almost 5% year over year, led by the strength in Vulcan’s aggregates and asphalt businesses. Consolidated gross margins continued to improve, expanding 340 basis points to 27%, largely due to robust aggregate pricing gains. Despite these gains, weak residential construction continues to weigh on Vulcan’s shipments and has shown little sign of improvement throughout the year. While infrastructure and nonresidential projects have buoyed volumes, softening nonresidential demand could create additional volume pressure. Nevertheless, we maintain our $154 fair value estimate.

Vulcan’s aggregate business saw a 2% decline in shipments year over year, but this was more than offset by a 15% increase in freight-adjusted selling prices. Segment gross margins expanded 200 basis points from a year ago to 31.3%, largely due to the realization of midyear price increases. Higher mortgage rates continue to constrain both single- and multi-family housing starts, but Vulcan has benefited from an uptick in highway spending and relative strength in nonresidential markets. Given the current demand environment, we forecast that 2024 aggregate volume will be roughly flat year over year, but pricing gains will drive mid-single-digit revenue growth in the segment.

Higher interest rates have weighed heavily on the housing market and constrained some of Vulcan’s aggregate shipments. Private nonresidential construction has held up better but has started to show signs of softening amid a higher interest rate environment and heightened economic uncertainty. Despite healthy state budgets and allocated infrastructure funds, infrastructure spending has yet to materialize into robust aggregate shipments. While we expect infrastructure spending will accelerate into 2024, there will be substantial ground to gain to make up for pullbacks in Vulcan’s other end markets.