Martin Marietta Materials, Inc.’s MLM third-quarter adjusted earnings per share of $2.04 missed the Zacks Consensus Estimate of $2.15 by 5.1%. However, earnings jumped 41% year over year from $1.45 driven by strong sales and margin expansion. Lower share count as a result of buybacks also had a positive impact on the bottom line.
Third-quarter adjusted earnings exclude loss on sales of cement operations and related expenses. Prior-year quarter’s adjusted earnings excluded expenses related to the Texas Industries (“TXI”) buyout last year.
Revenues Improve
Net sales of $1.0 billion increased 9.5% year over year driven largely by favorable pricing and improved volumes resulting from the growing demand for construction materials. Net sales also beat the Zacks Consensus Estimate of $994 million by 1.1%.
Excessive rainfall throughout the U.S., especially in Texas, delayed aggregates shipments and hurt production and efficiency levels in the second quarter which dented sales and profits. As weather normalized and strong demand and pricing momentum continued, the top line picked up in the third quarter.
In the reported quarter, heritage sales were $712 million, while acquired operations added $293.0 million to net sales. Heritage operations exclude acquisitions that were not included in operations for a full calendar year.
Freight and delivery revenues were $77.0 million, down 10.3% year over year. Total revenue (including freight and delivery) was $1.08 billion, up almost 8% year over year.
Segment Discussion
Aggregates: Aggregates business’ net sales grew almost 12% to $837.4 million driven by both strong pricing and improved volumes. Shipments (volume) as well as pricing increased 5.4% each in the aggregates product lines.
Heritage aggregates sales were $654.9 million, up 11.8% year over year, while acquired operations contributed $182.5 million to net sales.
Heritage aggregates product line volume rose 5.2%, while pricing increased 4.8%. Shipments grew in all the segments. The strongest pricing growth was seen in the West Group.
The acquired aggregates product line reported net sales of $45.6 million.
The aggregates business also includes Martin Marietta’s vertically-integrated operations, i.e., asphalt products, ready mixed concrete and road paving construction services. The heritage ready mixed concrete product line sales of $72.7 million went up 29%. The acquired (TXI) ready mixed concrete operations accounted for $137 million of net sales, up 8%. The asphalt product line added $27 million to net sales.
The Cement segment, formed after the TXI acquisition in Jul 2014, recorded net sales of $110.5 million, up almost 1% as higher pricing and synergy realization were offset by lower volumes.
In the quarter, the company completed the previously announced sale of its California cement business for $420 million. Excluding the California sale impact, cement shipments declined 4% due to loss of direct shipments to the energy sector and increased competition because of the introduction of new cement capacity in Texas.
Magnesia Specialties segment, which includes magnesium oxide, magnesium hydroxide and dolomite lime products, declined 2.3% year over year to $57.3 million due to lower domestic steel production.
Margin Rise
Total adjusted gross margin (excluding freight and delivery revenues) increased 480 basis points (bps) to 26.1% driven by higher margins in aggregates and cement.
Aggregates consolidated gross margins grew 500 bps to 25.3% driven by lower aggregates production cost per ton and energy cost savings. Magnesia Specialties segment’s gross margins declined to 33.9% due to lower revenues. Cement gross margin expanded 1,250 bps to 34.6%.
Selling, general and administrative (SG&A) ratio was 5.5%, up 20 bps year over year as lower energy costs were offset by higher pension costs.
Adjusted operating margin was 17.9%, up 530 bps as improved gross margins were offset by higher SG&A.
Other Update
Martin Marietta bought back $158 million shares in the quarter. In the first nine months, the company repurchased shares worth $258 million.
2015 Outlook
Management seems quite optimistic of seeing consistent demand increase amid the recovery in housing construction market which should boost sales, profits and cash flow, going ahead.
Aggregates product line volume is still expected to increase in the range of 7–10%. Heritage aggregates volumes are expected to increase 3% to 5%. Aggregates product line pricing is likely to increase 7% to 9% (maintained). Aggregates product line production cost per ton is expected to remain relatively flat compared with 2014, worse than a slight decline expected previously.
Sales in the Magnesia Specialities segment are expected between $235 million and $240 million (previously $240–$250 million). Cement sales are expected between $375 million and $400 million (maintained) while that in vertically integrated businesses are expected within $875–$925 million (maintained).
SG&A ratio is expected to be higher than 6%, worse than prior expectation of less than 6% due to an increase in heritage pension costs. Consolidated EBITDA is likely to range within $800 million to $820 million, down from $810 million to $850 million, excluding loss due to the sale of the California cement business.
However, management warned that an early onset of winter in key markets may end the construction season prematurely. Unfavorable winter weather hurts construction activity and results in operational inefficiencies which can prove to be a major headwind in the fourth quarter.
Martin Marietta carries a Zacks Rank #3 (Hold).
Stocks to Consider
Some better-ranked stocks in the construction sector are Vulcan Materials Company VMC, Gibraltar Industries, Inc. ROCK and Masco Corporation MAS. While Gibraltar Industries sports a Zacks Rank #1 (Strong Buy), Vulcan Materials and Masco have a Zacks Rank #2 (Buy).
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