$Vulcan Materials(VMC)$ is mostly a construction aggregates Group. The US aggregates demand (tonnage) is cyclical which makes VMC a cyclical company. Despite its good results over the past few years, its performance over the cycle is poor.
There was no shipment tonnage growth.
Revenue growth was due to price increases.
Gross profit margins and SGA margins were cyclical with no improvement trends.
Revenue and equity growths were low despite the acquisitions.
The key predictive metric I used is gross profitability (gross profits/total assets). According to Professor Novy-Marx, this has the same power as Price to Book in prediction cross section returns. You can see from Chart 1 that VMC gross profitability over the past few years was around that in 2005. There is no improvements (uptrend).
Chart 1: Vulcan Performance Index
Based on its valuation over the cycle, there is no margin of safety at the current price. This low value is due to the low cyclical margins, low revenue base and low cyclical asset turnover.
I looked at two scenarios with the results summarized in Chart 2. I used the following formula to determine its intrinsic value:
Value = Book Value X (ROE – g) / (Cost of equity – g).
Its value was USD 18 per share from a cyclical scenario. This was where the ROE was based on the 2007 to 2022 average.
Its value was USD 63 per share from a non-cyclical scenario. This was where the ROE was based on the 2021 to 2022 average.
Chart 2: Valuation scenarios
The current market price (7 Apr 2023) was USD 165 per share. You can see why I think its price is high relative to its fundamentals.
I am a long-term value investor. If you want more such value investing insights, visit my blog i4value.asia
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