Kristoffer Inton: Over the past two years, U.S. aggregates and concrete stocks--including companies like Martin Marietta and Vulcan Materials--have rallied about 50%, far outpacing the S&P 500.
While profits have climbed as construction markets recovered, the rally primarily reflects multiple expansion and expectations of higher profits in the years to come. Shares now trade at multiples higher than both historical and midcycle levels. Are they worth it?
To answer that question, we've developed a state-level outlook for future road spending that we roll up to a firm-level view. Different geographic footprints mean very different growth trajectories.
Among the group, Martin Marietta and Vulcan Materials are best-positioned. Their footprints are dominated by states that have significant spending needs and the fiscal strength to fulfill them. Smaller peer U.S. Concrete also boasts an attractive operating footprint. Summit Materials has the weakest growth prospects.
All told, we think the market does a fair job distinguishing among these different growth trajectories, and we think U.S. aggregates and concrete stocks are more or less fairly valued. That said, we think they offer good relative value for investors seeking exposure to the materials sector--a sector we regard as overpriced and one in which economic moats are relatively scarce.