3 Basic Materials Industries That Look Enticing

Andrew Lane: We had long-viewed the basic materials sector as overvalued, largely due to the fact that some of our key commodity price forecasts were bearish relative to consensus. However, due to the recent market sell-off and, with the basic materials sector having soundly underperformed the broader global equity market in 2018, some industry groups once again look enticing. I'd like to highlight three industries for which we see attractive risk-adjusted return potential.

First, due to our above-consensus forecast for global electric vehicle penetration, we see attractive valuations across the lithium producers we cover. We forecast 19% annual demand growth for lithium over the next decade, a growth profile nearly unprecedented in the broader basic materials space. Not only will this impressive growth trajectory sop up new supply additions, it will boost long-term lithium prices as higher-cost supply comes online to meet demand. Accordingly, SQM, Albemarle, and Livent, which is a lithium pure-play, are each trading well below fair value.

Second, we see value in the U.S. heavy-side building materials space. Decades of underspending has caused U.S. infrastructure to deteriorate, a concern that inevitably must be addressed, even if the timing is uncertain. Infrastructure is the most important end market for aggregates, cement, and downstream building materials, and the companies we cover in these industry groups are trading at bargain prices. While funding limitations have historically weighed on demand, the outlook will improve. First, we contend that midterm election and referendum results will ultimately boost funding at the national, state, and local levels. Until then, the FAST Act will continue to provide near-term funding support, as the Highway Trust Fund has sufficient funding to cover large outlays through 2021. Our top U.S. infrastructure plays are Martin Marietta, Summit Materials, U.S. Concrete, and Vulcan Materials.

Finally, thanks to our bullish outlook for uranium prices, we continue to view Cameco as an interesting long idea. Uranium prices fell each year from 2011 to 2017 but started to recover a bit in the second half of 2018. We see considerable upside ahead, as we expect global uranium demand to rise roughly 40% in absolute terms by 2025. In turn, this would drive prices upward to more than double current levels. With Cameco being a low-cost uranium miner, this will set the stage for materially higher profits for the company. Accordingly, the stock offers more than 50% upside at our current fair value estimate.