03 Apr Goldman Sachs says this construction could gain more than 20%
Vulcan Materials shares should see a better year as inflation cools, according to Goldman Sachs. Analyst Jerry Revich upgraded the construction stock to buy from neutral. His $212 price target implies the stock will rally 23.6% from Friday’s close. “We’re encouraged by (i) accelerating price/cost momentum, (ii) reduced consensus estimates, and (iii) an attractive risk reward for a stock that has compounded 10-year unit profitability at a 9% CAGR,” Revich said in a note to clients Monday. The stock has lost around 20% over the past 15 months compared with 11% in Revich’s coverage area. That underperformance has been driven by lower estimates because of a poor price-to-cost dynamic and cooling volume seen mainly in the residential market, he said. He said Vulcan’s aggregate margins have contracted because of accelerating inflation in short-cycle input costs, while longer-cycle margins were pressured because of committed prices for contracts that didn’t keep up with the rapid, recent pace of inflation. But Revich said price-to-cost started to show an acceleration in the fourth quarter with a future price increase teed up for the first quarter. And unit profitability, which he said is a key stock price driver, should accelerate as inflation stabilizes but prices remain elevated. While private construction spending is tied to the U.S. banking sector, he said aggregate volumes are down around 10% compared with the same period a year ago. That means Vulcan hasn’t been as harshly hit as prior periods of economic downturn considering volumes typically decline between 10% and 15% in a typical recession. By comparison, volumes fell 30% in 2009. And public construction spending should be strong, he said, as pent up demand from Covid years turn to contracts, he said. Rising office vacancies as well as reshoring and electrification trends can also help organic volumes after they likely bottom in the coming quarters. The residential business should also help as demand stabilizes, he said. Revich raised his mid-cycle EBITDA estimate to $2.01 billion from $1.752 billion after a review of bottom-up acquisition volumes over the past two decades showed volumes should come in higher. — CNBC’s Michael Bloom contributed to this report.