Infrastructure stocks have had a good run, and especially since the November U.S. elections. For its part, Martin Marietta Materials (NYSE:MLM) is up close to 30%, which puts it ahead of Vulcan Materials (NYSE:VMC), close to Cemex (NYSE:CX) and behind Steel Dynamics (NASDAQ:STLD)
over the past year. Although volume growth has been muted thus far in
the aggregates business (up 1% in 2015, up 2% in 2016, and up 3% in the
first quarter of 2017), pricing has been picking up and the volume
outlook is pointing to higher volumes on increased road building and
infrastructure activity.
My issue, not surprisingly,
is with how much improvement is already baked into MLM's valuation. MLM
is well-placed in states with attractive drivers for road construction
(as well as overall population, housing, and non-residential
construction), but quite a lot has to go right from here in terms of
government-supported infrastructure spending, overall economic health,
and so on just for MLM to "grow into" its valuation. With the shares
already at a mid-teens multiple to 12-month EBITDA and a low-teens
multiple to my mid-cycle estimate, this looks more like a momentum story
to me than a value-driven story. Momentum stories in recovering markets
can work, but any disappointments in federal stimulus, state spending,
volume growth, and/or margin leverage could have a sharper impact on the
share price.
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Martin Marietta Materials Already Pricing In A Lot Of Things Going Right
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