Profit from the US building boom with this construction giant

Before the collapse, the bridge was considered to be in “fair condition”. This rating indicates that all primary structural elements were sound but that the bridge may have had some minor problems. ‘Fair’ sits just above ‘poor’ in the federal rankings.

This is part of a wider problem in the US. Figures published by the White House state that one in five miles of highways and major roads, and 45,000 bridges, are in poor condition. This is why the government has allocated trillions of dollars of federal funding towards infrastructure over the past few years.

This spending is good for the country, and great for aggregates and concrete giant Vulcan Materials (US:VMC). The company owns hundreds of quarries and concrete plants across the country, making it one of the largest producers of crushed stone, sand and gravel in the US.

Powerful price rises

Vulcan was founded in 1909 as the Birmingham Slag company. It turned slag, the by-product of steel manufacturing, into construction material and was based in Birmingham, Alabama. It grew rapidly during the US’s post-second world war construction boom and in 1956 it rebranded to Vulcan Materials.

In the 1970s, Vulcan expanded outside of aggregates into the production of chemicals. However, it has since divested these businesses and is once again focused fully on aggregates. In 2007 it bought Florida Rock for $4.2bn (£3.4bn), then purchased Aggregate USA for $900mn in 2017, and acquired US Concrete for $1.3bn in 2021.

US Concrete owned 27 aggregate operations and more than 50 concrete plants across the US. This means Vulcan Materials now has more than 350 US-based aggregate facilities. Nearly all its revenue is generated domestically and this extensive network, which has been assembled at the cost of billions of dollars, creates a significant moat around the business.

This market dominance is reflected by Vulcan’s ability to raise prices. In the three months to December, the selling price of aggregate rose by 14 per cent from the same period the year before. Over a two-year period, prices are up by almost 30 per cent. This helped Vulcan’s operating margin to expand by 3.8 percentage points to 18.1 per cent last year, according to FactSet.

And this isn’t the end of the increases. Management expects prices to rise between 10 and 12 per cent in 2024, prompting analysts to forecast operating margins of 21 per cent.

Partly as a result of price rises, profitability came in ahead of analyst expectations in 2023. In the fourth quarter, adjusted cash profits leapt by 27 per cent to $476mn, which was ahead of the $453mn consensus forecast. “This is well ahead of our initial expectations and speaks to execution as [return on invested capital] increased 280 basis points year on year in 2023,” says Stifel analyst Stanley Elliott.

Government subsidies 

There is an important split between the private and public markets. On the public side, demand is high as a result of government subsidies. Chief executive J Thomas Hill said in February that there was “modest” growth in the second half of 2023, but that demand has accelerated in 2024, with trailing 12-month highway starts now surpassing $100bn.

“We continue to foresee growth in both highways and infrastructure activities for the next several years,” he explained.

This surge in public spending is driven by the US government’s push to improve domestic infrastructure. In 2019, a transportation infrastructure bill was passed, earmarking $287bn for highways over the next five years. This was followed in 2021 by the much larger Infrastructure Investment and Jobs Act, which unlocked $1.2tn in federal funding to be spent over the next decade. It is focused on investing in clean water, high speed internet, and repairing and rebuilding roads.

On the private side of Vulcan’s business, however, there is a “mixed bag of strengths and weaknesses”, as high interest rates are making companies and families more cautious about spending. The main areas of weakness are warehouses and multi-family residential buildings.

The good news is this leaves room for further improvement. “With many markets still down 15 per cent-plus from normalised demand, we believe Vulcan is well positioned to capitalise on improving residential, non-residential, and public construction demand trends”, says Stifel’s Elliott.

The government will be hoping public spending will bleed over into the private sector. The US workforce added 303,000 jobs in March, spread widely across sectors, suggesting the pace of hiring is accelerating. The flipside of this is that US inflation is staying stubbornly above 3 per cent. For Vulcan Materials, however, this isn’t too much of a problem; it has proved that it can pass higher costs onto customers.

Vulcan is also efficient at turning its profit into cash. In the 12 months to December, its operating earnings jumped by 50 per cent and its operating cash flow rose by 34 per cent to $1.5bn. It invested $625mn of this into maintenance and growth projects, which was ahead of the $617mn of depreciation. In fact, in the past few years Vulcan has consistently spent more on capex than depreciation which means, unlike the US’s bridges, its assets should be in good condition.

Highly valued

Unsurprisingly for a company with pricing power, strong cash generation and exposure to the US government subsidies, it doesn’t come cheap. Vulcan trades on a forward price/earnings ratio of 29, which is fractionally ahead of its rival Martin Marietta’s (US:MLM) multiple of 27 times.

Given the strong growth prospects forecasted by analysts, however, the valuation gets more attractive as we look further ahead. In 2026, brokers are expecting Vulcan’s earnings per share (EPS) to reach $10.9, up 55 per cent on the $7 it made last year. Promisingly, these numbers have been consistently upgraded throughout the year. As recently as February, analysts were forecasting 2026 EPS of around $9. Positive surprises are always good to see and suggest there is potential for further upgrades.

Much of the media focus has been on the US investment in semiconductors to help keep it ahead of China in the race to develop artificial intelligence and boost its hollowed-out manufacturing base. However, this investment doesn’t exist in a vacuum. For the country to rejuvenate its industrial sector, it needs to connect everyone, improve grid capacity and repair its crumbling bridges.

To do all of this, it will need a lot of crushed stone. Vulcan Materials is unlikely to see its share price grow rapidly given its already high valuation. But its earnings and operating cash flow look set to keep expanding over the next decade. In an era of high interest rates, this is a trait that should be highly valued.