Investors looking for value in a pricey market should consider 6 notably unglamorous stocks in the heavy materials sector, according to a report by Barron's. This is a $100 billion market in the U.S., bounded by high barriers to entry and local quasi-monopolies. These 6 producers of construction materials such as asphalt, cement, concrete, sand, gravel and crushed stone have endured big stock price declines in 2018: U.S. Concrete Inc. (USCR), Eagle Materials Inc. (EXP), Martin Marietta Materials Inc. (MLM), Vulcan Materials Co. (VMC), Mexico’s Cemex SAB de CV (CX), and Summit Materials Inc. (SUM).
Last week, all these companies except Cemex took stock price hits due to Hurricane Florence, based on possible disruptions to their operations. "The stocks are going down on weather issues; it's not like they're losing that business, it's delayed," Craig Hodges, CEO of Dallas-based Hodges Capital Management, told Barron's.
Ready to Rebound
|Stock||YTD Gain||Key Products|
|Cemex||(5.3%)||Cement, concrete, aggregates, concrete block and pipe|
|Eagle Materials||(23.4%)||Limestone, gypsum, aggregates, cement|
|Martin Marietta Materials||(12.1%)||Aggregates, cement, asphalt|
|Summit Materials||(39.3%)||Aggregates, cement, concrete, asphalt|
|U.S. Concrete||(38.9%)||Concrete, aggregates|
|Vulcan Materials||(13.0%)||Aggregates, asphalt, cement, calcium|
Source: Yahoo Finance; based on adjusted close data through Sept. 17.
Aggregates include materials such as crushed stone, sand and gravel that are commonly used in road beds. The uses of calcium include animal feed, the production of plastics, and water purification. Limestone is an ingredient in various types of cement, and gypsum is used in wallboard.
Bill Sandbrook, chair and CEO of U.S. Concrete, shared this statement with Investopedia: "We feel very strongly that the long-term outlook for our business and markets is quite favorable. In New York City, San Francisco and Dallas, where we hold market-leading positions, our materials are being used in a majority of the highly specialized projects in commercial and residential construction and infrastructure development, such as LaGuardia Airport, Hudson Yards, Google Bay View Campus and Facebook Data Center in Dallas. Furthermore, our backlog runs very deep so we continue to feel good about where we are in this cycle.” U.S. Concrete holds a top three position in every market that it serves, including the top spots in New York City, the San Francisco Bay Area and West Texas, Seeking Alpha reports.
Positive Macro Trends
Unless the economy slips into a recession, these construction materials companies have a strong outlook for long-term growth. Rapidly-deteriorating transportation infrastructure is in urgent need of repair and rebuilding, including roads, bridges, tunnels and rapid transit systems. While these companies also supply the home building and office building markets, public works projects such as roads and bridges use a greater proportion of their projects, and thus are a more significant source of profits, per Barron's.
Additionally, these companies tend to have significant pricing power, Barron's observes. That's partly related to the fact that securing approvals to open new quarries, mines or gravel pits often faces high political hurdles, especially in highly populated areas. This represents a high barrier to new competition.
The shares of heavy materials stocks soared after the election of President Trump, based on his pledge to spend $1.5 trillion on infrastructure upgrades. But they have floundered since then, as Trump has failed to advance his plan. Whether or not the Trump federal initiative finally gets underway, "eventually there has to be a way for additional funding to come, and that will justify the actual earnings growth that the stocks were previously pricing in," says Kristoffer Inton, an analyst with Morningstar Inc., per Barron's. For example, New Jersey has been increasing its gasoline tax to fund a $2 billion annual transportation spending plan, and California has a $52 billion plan of its own.
While rebuilding efforts in the wake of Hurricane Florence are sure to increase demand for these companies' products, the short-term impact has been negative on some of their stock prices. The reason is that several of them have quarries, mines and pits that are in the path of Florence, and thus subject to flooding that will impair production until they are pumped out. As forecasts of Florence's path and intensity solidified last week, all these stocks except Mexico-based Cemex plunged on Monday Sept. 10. Shares of Eagle, Martin Marietta, and Summit are still down, while U.S. Concrete and Vulcan have since rebounded above their Friday Sept. 7 closing prices.