A good variety of U.S. stocks have begun an upturn since the S&P 500’s most recent price correction, and I’ve found an industry group in which all the major players are rising: construction aggregates. Aggregates are building materials, including sand, gravel, crushed stone, slag and concrete.
I’ve been following and investing in this group for several years because of the companies’ spectacular earnings growth and strong balance sheets. Sure, their stocks fell with the recent market correction, but there’s nothing wrong with the industry.
Demand for construction materials remains strong due to the bullish housing market. In addition, Congress approved a $305 billion five-year U.S. highway-funding plan in December, and many individual states are in the midst of large infrastructure projects.
Construction aggregate supplier Martin Marietta Materials (MLM) reported earnings per share (EPS) increases for the last four years, included 20.3% EPS growth in 2015 (December year-end). The company mines, produces and sells granite, limestone, sand, gravel, cements and magnesia-based chemicals. It’s the second-largest company in its industry, serving 32 states and Canada.
Martin Marietta released full-year 2015 results on February 9 that reflected record net sales of $3.3 billion, up 22% year over year, despite record-breaking wet weather in several of its key geographies. Annual net income rose 38% to $722 million, reflecting a 260-basis-point increase in consolidated gross profit margins.
It’s nice that the company had a good year, but show me the money! How does Martin Marietta’s future look?
Aggressive Earnings Growth Plus Value
Wall Street’s consensus estimates reflect additional EPS growth of 48% and 34% in 2016 and 2017! These profit projections reflect increases in pricing and sales volume, along with lower supply costs and acquisitions. The construction business is growing in all of Martin Marietta’s service areas: residential and non-residential, energy-related and public sector projects. In addition, substantial contractor backlogs exist as a result of the historic rainfall in 2015.
Clearly, the company’s on track for aggressive earnings growth. But as an investor, you also want to make sure that the stock you’re buying is undervalued. If it’s overvalued, that means that everybody else bought it before you did and there are very few buyers left to drive the price up.
We measure value by looking at the price/earnings ratio (P/E). If the 2016 P/E is below the 2016 consensus earnings growth rate, then it’s fair to say that the stock is undervalued. There are some nuances to that calculation, but you can use that rule of thumb to get 80% to your goal of minimizing risk by concentrating on undervalued growth stocks.
Martin Marietta’s 2016 P/E is 19.9—less than half the earnings growth rate! Frankly, most stocks of construction aggregate companies have similarly attractive fundamentals. I’m only half-joking when I say that you could put aggregate companies’ names up on the wall and throw darts, and you’d likely pick a winner!
As they say in infomercials, “But wait. There’s more!” MLM not only offers aggressive earnings growth (which, in theory, correlates to aggressive stock-price growth) and low valuation, but the stock also has a 1.2% dividend yield!
And the company repurchased 4.8% of its common stock in 2015.
Yeah, I love this stock. It’s got something for everybody! Martin Marietta returned nearly $630 million to shareholders in 2015 through dividends and share repurchases.
What to Expect from the Share Price
MLM rose to all-time highs in September 2015, then corrected with the overall market. The stock stabilized in mid-January, then began climbing after news emerged of 2015 results and the company’s continued strong outlook for 2016.
There’s short-term upside price resistance at 140, where the stock will likely pause. The next move will depend on the momentum of the overall market. A continuing S&P 500 rebound could easily lift MLM’s share price to 160, where the stock will hit medium-term upside price resistance. (As the stock approaches 160, I invite you to send me an email (crista@cabotwealth.com) for a reassessment of the outlook for the company and its stock.)
MLM is an undervalued, aggressive growth large-cap stock, with a 1.2% dividend and a strong balance sheet. The only things the company lacks are glamorous products and funny Super Bowl ads.
But who needs glamour, when the real goal is capital gains? In the words of Pro Football Hall of Famer Ken Stabler, “Throw deep.”
Happy Investing,
Crista Huff
Chief Analyst, Smart Investing in Turbulent Times
