Vulcan Is Well Positioned to Benefit from Infrastructure Spend, but Near-Term Headwinds Remain

Equity Analyst

Spencer Liberman

Revenue segments as reported by the company.

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Asphalt

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Calcium

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Aggregates producer Vulcan Materials is well positioned to benefit from the ongoing recovery of US construction spending. We forecast strengthening demand growth for the public sector and modest growth for the private sector. Accounting for roughly 40% of shipments, public-sector demand is generally more stable, and projects, primarily highway construction, are more aggregate-intensive per dollar of spending. Federal funding power has weakened as better vehicle mileage and inflation have diminished the buying power of the $0.18 per gallon gasoline tax, unchanged since 1993. The FAST Act, passed in December 2015, provided stability and near-term funding certainty but did not solve the still-weakening gas tax. However, long-term federal funding was passed in late 2021, totaling $1.2 trillion. 

The outlook for road spending differs considerably from state to state. Differences in population growth, road conditions, funding mechanisms, and overall state fiscal health influence spending. Vulcan's largest states by revenue—Texas, California, Georgia, Tennessee, and Virginia—have significant road spending needs and strong finances to support robust growth. 

Private-sector demand consists of residential and nonresidential construction, including commercial and industrial properties. Nonresidential construction is the most important driver in the category, as spending is more material-intensive per dollar than residential construction. We expect nonresidential spending growth to moderate in the longer term, as we expect many key sectors to make more efficient use of their construction spending. Additionally, we expect residential starts to converge to our long-term housing starts forecast of 1.365 million by 2032. Residential construction historically supports nonresidential construction growth.

Business Strategy & Outlook

We think Vulcan Materials benefits from durable competitive advantages that should support economic profits for at least the next 10 years. We assign Vulcan a narrow moat rating based on its intangible assets and cost advantage. Vulcan is the largest producer of aggregates in the United States. The company also operates a smaller asphalt and ready-mixed concrete business. The US aggregates market is highly fragmented and composed of over 1,000 companies. Many of these firms operate small, local operations that pale in comparison to Vulcan. The low value/weight ratio of aggregates severely limits the range of deliveries and places an importance on quarry locations while permits remain difficult to obtain. Vulcan benefits from a regional transportation cost advantage over competitors whose quarries are located further away from highly populated areas. This advantage stems from the company’s permits, which prevent significant increases in supply in Vulcan’s existing regions. The commoditized nature of building materials requires companies to possess cost advantages in order to reliably generate economic profits.

Aggregates account for over 75% of Vulcan’s consolidated revenue and an even larger portion of the companies’ gross profits. Aggregates typically sell for $19 or more per ton, leading to an extremely low value/weight ratio. Given the lack of water or rail access at most quarries, more than three fourths of aggregates ship by truck. Transportation by truck costs roughly $0.15-$0.65 per ton per mile, limiting the potential range of deliveries to roughly 50 miles or less before transportation costs begin to outweigh the cost of the aggregate itself. Vulcan’s quarries tend to be located close to its customers in highly populated urban areas. Distant outside operators would need to subsidize their prices (lowering profitability) to encourage customers to incur higher transportation costs. With most aggregates producers lacking efficient water or rail alternatives, markets tend to be extremely localized, with high barriers to entry. The highly fragmented nature of the industry, which consists of many local markets and low market shares, is testament to the difficulty of transporting the product long distances.

Vulcan benefits from its permits (intangible assets) that are difficult to obtain and make it challenging for competitors to open new quarries. Building material producers face extreme opposition from local communities in obtaining approval for quarries due to the environmental impact and noise pollution that production causes. Not-in-my-backyard tendencies make the permitting process difficult in developed markets and create a high barrier to entry. Once a quarry is present in a region, the likelihood of authorities permitting additional capacity is extremely unlikely. Furthermore, while populous metropolitan areas are the centers of construction activity, new quarry permits are difficult to obtain as a result of not-in-my-backyard tendencies. We think Vulcan’s competitive advantage is durable because we do not anticipate the importance of aggregates in construction diminishing, transportation costs to fall, or new quarry permits to become easier to obtain. 

Infrastructure projects are typically resilient during economic downturns as governments tend to fund projects through the cycle to support the economy and prevent job losses. Stable demand has supported consistent price increases through economic cycles and led to subsequent margin expansion for manufacturers. From 2007 to 2021, Vulcan’s price increases exceeded inflation in all but five years. During this period, the firm's price per ton grew over 90%, while inflation rose roughly 31%. Additionally, Vulcan only recorded one year of price contraction during this 15-year period. This is a testament to the firms’ durable pricing power, even during times of softer demand. During the most recent construction demand trough, the firm failed to generate returns on invested capital in excess of its cost of capital as historical levels of construction led to a record slowdown in spending. Utilization rates took years in some areas to catch up with completed projects, which slowed recovery and weighed on Vulcan’s returns for multiple years. Since then, Vulcan has steadily grown revenue, selling prices, and returns as demand normalized.

During the most recent construction demand trough (the period prior to the covid-19 downturn), the company failed to generate returns on invested capital in excess of its cost of capital. We think high capacity utilization will be necessary to generate excess returns. Because we do not have the confidence that demand will be strong enough to reach appropriate levels of utilization throughout the entire construction cycle, we refrain from assigning the company a wide moat rating at this time.

We think downstream materials such as ready-mixed concrete and asphalt (byproducts of cement and aggregates) do not benefit from an economic moat. The low value-to-weight argument (cost advantage) does not hold since producers do not require permits (intangible assets) that prevent new entrants. For asphalt, 95% of the weight is composed of aggregates while aggregates make up roughly 80% of ready-mixed concrete. Essentially, aggregates are mixed with water and cement or liquid asphalt cement to produce ready-mixed concrete and asphalt. There are almost no barriers to entry for the mixing process, as anyone can purchase the inputs to produce concrete or asphalt. This creates a highly competitive market where participants compete on price. These products are also relatively commoditized, which results in these businesses generating lower profit margins than producers of upstream materials, which exhibit greater barriers to entry. It is worth noting that the production of cement and liquid asphalt cement benefit from strong competitive advantages that generally warrant an economic moat, but Vulcan purchases these inputs from third-party producers.

Narrow

Economic Moat

Vulcan Materials

Vulcan Materials Co. engages in the provision of basic materials and supply for the infrastructure and construction industries. It operates through the following business segments: Aggregates, Asphalt, Concrete, and Calcium. The Aggregates segment produces and sells asphalt mix and ready-mixed concrete primarily in its mid-Atlantic, Georgia, Southwestern, Tennessee, and Western markets. The Asphalt segment produces and sells asphalt mix in Arizona, California, New Mexico, Tennessee, and Texas. The Concrete segment produces and sells ready-mixed concrete in California, Georgia, Maryland, New Mexico, Texas, Virginia, Washington D.C., and the Bahamas. The Calcium segment produces calcium products for the animal feed, plastics, and water treatment industries with calcium carbonate material mined at the Brooksville quarry. The company was founded in 1909 and is headquartered in Birmingham, AL.

Earnings data Q2 2021

Earnings data Q3 2021

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Earnings data Q1 2024

Earnings data Q2 2024

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Vulcan Materials Co. engages in the production of construction aggregates. Its products include crushed stone, sand, and gravel. It operates through the following business segments: Aggregates, Asphalt, Concrete, and Calcium. The Aggregates segment produces and sells asphalt mix and ready-mixed concrete primarily in its mid-Atlantic, Georgia, Southwestern, Tennessee, and Western markets. The Asphalt segment relates to the production and selling of asphalt mix in Arizona, California, New Mexico, Tennessee, and Texas. The Concrete segment refers to the production and selling of ready-mixed concrete in California, Georgia, Maryland, New Mexico, Texas, Virginia, Washington D.C., and the Bahamas. The Calcium segment includes the production of calcium products for the animal feed, plastics, and water treatment industries with calcium carbonate material mined at the Brooksville quarry. The company was founded in 1909 and is headquartered in Birmingham, AL.

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