Martin Marietta Banks on Acquisitions, Costs Continue to Rise

Martin Marietta Materials, Inc. MLM is likely to benefit from ongoing acquisitions & divestitures, and higher demand in public sector construction. However, higher labor, freight and material costs, as well as a constrained mortgage environment remain concerns for the company.

Driving Factors

Martin Marietta is one of the leading suppliers of construction aggregates in the United States. The company has a vast network of aggregate quarries and distribution centers throughout the United States.

Martin Marietta completed more than 85 smaller acquisitions since its Initial Public Offering in 1994 through 2017, which strengthened its position in the Aggregates business. In April 2018, Martin Marietta acquired Bluegrass Materials Company, which bolstered the high-growth regions of Southeastern and Mid-Atlantic.

Along with acquisitions, the company has been actively divesting various underperforming operations since 2001. Recently, Martin Marietta disposed its heritage Forsyth aggregates quarry, north of Atlanta, Georgia, and the legacy Bluegrass Beaver Creek aggregates quarry in western Maryland.

Meanwhile, the company is experiencing robust the public infrastructure market that accounted for approximately 40% of the company’s second quarter of 2018 aggregate volume. Shipments (volume) in the aggregates product line increased 11.3% on 3.5% pricing growth in the second quarter, suggesting an overall construction recovery.

Moreover, the continued higher aggregate shipments are expected to increase the company’s profitability in the near future. Additionally, the outlook for residential construction remains robust, particularly in the core Martin Marietta markets.

Factors like positive employment scenario and robust economic fundamentals are driving the sector’s performance.The aforementioned initiatives are driving the company’s results. In second-quarter 2018, its earnings and revenues increased 43.2% and 13.1% year over year, respectively.  

Martin Marietta’s shares have increased 1.1%, outperforming its industry growth in the past month. Meanwhile, estimates for the current year have moved up 1.6% over the past 60 days, reflecting analysts’ optimism surrounding the stock’s earnings prospects.

Concerns

Martin Marietta’s businesses are subjected to weather-related risks that can significantly affect production schedules and profitability. Excessive rainfall, flooding, or severe drought can jeopardize shipments, production, and profitability in all of the company’s markets.

Currently, abnormally wet weather conditions in many markets are affecting the pace of construction activity. Geographic mix restricted pricing growth to just 2% in the Southeast Group, as weather and railroad inadequacies hindered its ability to move higher-priced aggregate products by rail in Georgia and Florida distribution yards.

Higher costs are likely to pressurize the company’s gross margin and also the bottom line. Higher petroleum coke costs and Kiln outages contributed to a 120-basis point reduction in product gross margin to 36.5% in the cement business.

Also, project delays contributed to 6% decrease in hot mixed asphalt shipments in Colorado in its downstream business. Energy and higher equipment rentals have resulted in greater cost-related issues as because the company is anticipating higher volumes in near future.

Zacks Rank & Key Picks

Currently, Martin Marietta carries a Zacks Rank #3 (Hold). Some better-ranked stocks from the same sector include Continental Building Products, Inc. CBPX, PGT Innovations, Inc. PGTI and NCI Building Systems, Inc. NCS. While Continental Building and PGT Innovations sport a Zacks Rank #1 (Strong Buy), NCI carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Continental Building’s earnings for 2018 are expected to increase 50.4%.

NCI is expected to record 77.5% earnings growth in fiscal 2018.

PGT Innovations’ 2018 earnings are expected to grow 78.7%.

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