Vulcan Reports Solid Results in Q4, but a Slowdown in Private Sector Spending Weighs on Volumes

Vulcan reported solid fourth-quarter results as lower volumes and rising costs were largely offset with strong price growth. Consolidated sales increased 8% year over year with strong gains in its aggregates and asphalt businesses. Gross margins were pressured in the quarter, decreasing 170 basis points year over year to 20.2%, largely driven by weather-related disruptions and sequential increases in operating costs. While demand appears to be flattening, pricing remains strong across Vulcan’s portfolio as all product lines saw double-digit price growth in 2022.

The company’s aggregates business posted a 9% increase in fourth-quarter revenue year over year but saw shipments decline roughly 6%. While a majority of this decline is attributed to inclement weather and the shut down of its Mexico operations in 2022, a slowdown in residential construction is beginning to weigh on volume. Nonresidential held up through the end of the year, but slowing housing starts in 2023 will likely lead to a pullback in nonresidential construction as well. Management’s 2023 guidance calls for aggregate shipments to decrease 4% (midpoint) due to pullback in both residential and nonresidential construction. Despite the uncertainty around aggregate demand, Vulcan continues to implement price increases, with its most recent increase announced at the beginning of 2023.

While pricing remains robust, demand across Vulcan’s portfolio appears to be normalizing as private sector spending slows. We maintain our view that a near-term decline in residential and nonresidential construction will likely be offset by robust public sector spending, but it is unclear if spending will ramp quick enough in 2023 to offset private sector declines. That said, we expect additional pricing actions across all materials during the year as Vulcan uses its pricing power to offset lower volumes and higher operating costs. We are maintaining our fair value estimate of $145 per share.