A significant boost in infrastructural and public construction spending should continue to favor the Zacks Building Products - Concrete & Aggregates industry. Also, strong demand stemming from the positive momentum of the U.S. housing market is acting as a tailwind. Indeed, coronavirus-led restrictions, unprecedented supply-chain disruptions, weather-related woes and higher labor costs are eating into the industry players' margins. Nonetheless, prominent companies in the industry like Vulcan Materials Company VMC, Martin Marietta Materials, Inc. MLM, Eagle Materials Inc. EXP, Summit Materials, Inc. SUM and Cornerstone Building Brands, Inc. CNR have been gaining from the positives.
Industry Description
The Zacks Building Products - Concrete & Aggregates industry consists of manufacturers, distributors and sellers of construction materials like aggregates, concrete along with other related items for public infrastructure, residential and non-residential as well as other end markets. The materials also include gypsum wallboard, recycled paperboard, concrete blocks, ready-mix concrete, and oil and gas proppants. The industry players are also involved in designing, engineering, manufacturing, marketing, and installation of external building products for commercial, residential, and repair and remodel markets in domestic as well as international markets.
3 Trends Shaping the Future of Concrete & Aggregates Industry
Focus on Reviving Infrastructure: On Nov 15, 2021, President Joe Biden signed a bipartisan infrastructure bill of $550 billion, in addition to approved funds of $450 billion for five years in August. Total spending may go up to $1.2 trillion if the plan is extended to eight years. This bill comprises new investments in almost every infrastructure sector over the next five-year period, including transportation, energy, broadband and water. Out of the total allotted spending, the infrastructure development law will provide $100 billion toward roads, bridges and other major projects. It will invest $66 billion in freight and passenger rail, including potential upgrades to Amtrak. The project will provide $11 billion toward reducing car crashes and fatalities through a "Safe Streets for All" program. Biden administration's endeavor to pump money for rebuilding the nation's roads, bridges and other infrastructure would give construction companies like Vulcan, Martin Marietta, and others a solid foundation for growth.
In addition to the U.S. administration's focus on enhancing the country's infrastructure by upgrading highways, railroads, bridges, and broadband, the positive momentum of the U.S. housing market is acting as a tailwind for the industry players.
Acquisitions & Focus on Operating Efficiency: The industry participants follow a well-chalked-out acquisition plan to enhance domestic and international portfolios. Meanwhile, companies are increasingly focusing on reducing controllable costs and maximizing operating efficiency across business lines to generate higher earnings as well as cash flow.
Shortage of Skilled Labors, Fluctuation in Input Prices & Weather Woes: The industry players are struggling with the shortage of skilled laborers, rising wage costs and escalating material expenses. The companies use electricity, diesel fuel, liquid asphalt and other petroleum-based resources. Hence, supply-related woes and significant fluctuation in the prices of these resources affect operating results. The businesses are exposed to weather-related risks that affect production schedules and hence profitability. Excessive rainfall, flooding or severe drought jeopardize shipments and production. The first and fourth quarters are mostly affected by winter. Again, hurricanes in the Atlantic Ocean and Gulf Coast are most active during these quarters. These impediments may continue to bump up costs and mar the industry participants' profits.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Building Products - Concrete & Aggregates industry is an 11-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #113, which places it in the top 45% of more than 250 Zacks industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates impressive near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry's positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group's bottom-line growth potential. Since December 2021, the industry's earnings estimates for 2022 have been revised 3.4% upward.
Before we present a few stocks that you may want to consider for your portfolio, let's take a look at the industry's recent stock-market performance and valuation picture.
Industry Outperforms Sector, Lags S&P 500
The Zacks Building Products - Concrete & Aggregates industry has outperformed the broader Zacks Construction sector but lagged the Zacks S&P 500 composite over the past year.
Stocks in this industry have collectively gained 4.6% versus the broader sector's decline of 5.8%. Meanwhile, the S&P 500 has climbed 15.2% in the same period.
One-Year Price Performance
Industry's Current Valuation
On the basis of the forward 12-month price to earnings, which is a commonly used multiple for valuing Building Products - Concrete & Aggregates stocks, the industry is currently trading at 17.6X versus the S&P 500's 20X and the sector's 12X.
Over the past five years, the industry has traded as high as 26.6X, as low as 12.9X and at a median of 19.7X, as the chart below shows.
Industry's P/E Ratio (Forward 12-Month) Versus S&P 500
5 Concrete & Aggregates Stocks to Keep a Close Eye On
Below we have discussed five stocks from the industry that have solid earnings growth potential. The chosen companies currently carry a Zacks Rank #1 (Strong Buy) or 2 (Buy) or 3 (Hold). You can see the complete list of today's Zacks #1 Rank stocks here.
Summit Materials: Based in Denver, CO, this is a construction material company. Migration activity amid the pandemic continues to favor SUM's rural and exurban markets. Additionally, strong execution of its Elevate Summit strategy and higher average selling prices for aggregates have been aiding the company to drive growth. It remains focused on sustainable improvement via investments in greenfields and end markets that are underpinned by sturdy growth fundamentals.
Summit Materials has gained 6.5% over the past year. This Zacks Rank #1 company's earnings estimates for 2022 have moved 4% upward in the past 30 days. Meanwhile, earnings for 2022 are expected to grow 38.4%.
Price and Consensus: SUM
Eagle Materials Inc.: This Dallas, TX-based company produces and supplies heavy construction materials, light building materials, and materials used for oil and natural gas extraction in the United States. Improved cement, concrete and aggregates sales volume as well as solid contribution from the recently-acquired Kosmos Cement business have been aiding the company. Higher pricing is also adding to the positives.
Eagle Materials currently carries a Zacks Rank #3 and has lost 1.3% in the past year. Its earnings estimates for fiscal 2023 have moved 0.4% upward in the past 30 days. Earnings for fiscal 2023 are expected to grow 21.3%.
Price and Consensus: EXP
Cornerstone Building Brands: This Cary, NC-based company is the manufacturer of exterior building products, mainly in North America. It is gaining traction, courtesy of higher volume leverage on robust demand for residential products and benefits from cost-reduction initiatives. Although Cornerstone Building Brands has been experiencing supply chain disruptions, strong residential end markets have been helping it navigate through the situation. The company's strong operational execution is positioning Cornerstone Building Brands for long-term profitable growth.
Cornerstone Building currently carries a Zacks Rank #3 and has gained 79.5% over the past year. The company's 2022 earnings are expected to increase 30%.
Price and Consensus: CNR
Martin Marietta Materials, Inc.: Based in Raleigh, NC, Martin Marietta produces and supplies construction aggregates as well as other heavy building materials — mainly cement — in the United States. Single-family housing strength, expanded infrastructure investment along with recovering private non-residential markets and heavy industrial projects of scale are expected to support near-term shipment levels. Also, the Lehigh West Region and Tiller buyouts will enhance its reach in new geographies for persistent industry-leading growth.
Martin Marietta currently carries a Zacks Rank #3 and has gained 15.6% in the past year. Earnings for 2022 are expected to rise 12.5% and the same for 2023 is likely to grow 25.2%.
Price and Consensus: MLM
Vulcan Materials Company: This Birmingham, AL-based company produces and supplies construction aggregates, asphalt mix as well as ready-mixed concrete. The company's focus on four strategic initiatives — Commercial Excellence, Operational Excellence, Strategic Sourcing, and Logistics Innovation — will enhance price performance as well as operating efficiencies. Vulcan Materials has been generating higher earnings despite tepid revenues on the back of prudent cost-control efforts and increased pricing in aggregates. Its focus on a systematic inorganic strategy for expansion is adding to the positives.
Vulcan currently carries a Zacks Rank #3. The company's shares have gained 8.7% over the past year. Earnings for 2022 and 2023 are expected to grow 26% and 27.1%, respectively.
Price and Consensus: VMC
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