On Nov 6, we issued an updated research report on Martin Marietta Materials, Inc. MLM.
After a difficult first half, the company reported better third-quarter results on Nov 3. Despite missing the Zacks Consensus Estimate for earnings, the company beat the same for revenues. Earnings of $2.04 per share rose 41% year over year driven by strong sales and margins. Favorable pricing and improved volumes backed by growing demand for construction materials led to 9.5% revenue growth. Shipments improved in almost all the end markets.
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 improved in the third quarter.
However, management issued cautious fourth-quarter outlook at the third-quarter conference call. In September-October, many of the company’s key markets, including Texas, witnessed significant rainfall which may affect operational and production efficiencies. Moreover, management warned that an early onset of winter in the key markets may bring the construction season to a premature end. Cold weather hurts construction activity and results in operational inefficiencies which can prove to be a major fourth-quarter headwind.
Moreover, until the new multi-year bill is passed, uncertainty regarding highway construction funding will remain. This, in turn, creates uncertainty about the timing of large projects for Martin Marietta. The bill was recently extended again, this time till the end of November.
However, robust pricing gains, synergies from the Texas Industries acquisition and strong financial position are the company’s strength.
Martin Marietta acquired Texas Industries, a leading supplier of heavy construction materials, in 2014. The buyout solidified the company’s position in the aggregates space and increased its concrete presence in high-end markets like Texas. The company also gained exposure to the growing cement markets in Texas and California as Texas Industries was the largest producer of cement in Texas and a major Californian cement producer.The company expects annual synergies of $120 million from Texas Industriesby the end of 2016.
Stocks to Consider
Martin Marietta has a Zacks Rank #3 (Hold). Some better-ranked stocks in the construction sector are Quanex Building Products Corporation NX, Gibraltar Industries, Inc. ROCK and Masco Corporation MAS. While Gibraltar Industries sports a Zacks Rank #1 (Strong Buy), Quanex Building Products and Masco have a Zacks Rank #2 (Buy).
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