USG Corporation (USG), Martin Marietta Materials, Inc. (MLM): Homebuilder Sentiment Surges Above Expectations

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Mortgage rates have picked up substantially in recent weeks ahead of the FOMC meeting, reducing homebuyers’ housing affordability. As a result, homebuilders may become concerned about falling demand. On the bright side, the housing outlook remains positive due to housing starts up a strong 28.6% YoY and permits up 20.8% YoY. Moreover, the National Association of Home Builders (NAHB) Housing Market Index, a measure of homebuilder sentiment, surged to 52 in June from 44 in May. This is the highest level since March 2006 and the first time the index reached above breakeven levels since April 2006. Expectations were looking for a modest uptick to 45.

USG Corporation (NYSE:USG)

Helped by public constructions

Vulcan Materials Company (NYSE:VMC) is the largest producer of construction aggregates with a diversified customer base. The downturn in construction activity has hit them big time, but as the U.S. economy recuperates, the company should be able to bounce back quickly. As a producer of asphalt mix, concrete, and cement in Florida, it has benefited from gains related to starts activity that were higher than average in the Southeastern part of the country.

The company expects earnings to improve in 2013 and deserves a strong “buy” recommendation, founded on the following four reasons:

  1. Pricing power: high barriers to entry should help Vulcan Materials Company (NYSE:VMC) bear price increases ahead of inflation, resulting in expanding margins and resilient returns on invested capital.
  2. Growth: aggregates shipments are expected to grow in the range of 1%-5% in 2013, ahead of 2012’s 1% decline. The company’s production facilities and aggregates reserves are situated at close proximity to large metropolitan cities, thus giving it a competitive advantage to invest in high-return projects.
  3. Cost-cutting: aggressive cost control initiatives are still in progress. Last year, cost saving actions resulted in improved per-ton margins and lowered its Selling, General, and Administration costs by 11%. EPS is expected to increase 109% this year and 19% next year.
  4. Demand: the company should benefit from increasing demand volumes in the private and public sectors. Some outstanding initiatives include the new highway bill and an expanded Transportation Infrastructure Finance and Innovation Act (TIFIA) program that provides credit assistance in the form of secured loans, loan guarantees, and lines of credit to major transportation infrastructure projects.

Growth and acceleration in EPS

Martin Marietta Materials, Inc. (NYSE:MLM) is the nation’s second-largest producer of construction aggregates and a large producer of magnesia-based chemicals and dolomitic lime. As such, the firm is highly sensitive to economic conditions associated with the housing and construction markets. During challenging times, however, the company’s strong balance sheet serves as a dose of protection.

Martin Marietta Materials, Inc. (NYSE:MLM)‘s management predicts a 2%-4 % increase in pricing of heritage aggregates for the current year, based on stronger new construction activity across the country. Last March, the company’s CFO announced a regular quarterly cash dividend of $0.40 per share of common stock, which represents a cash dividend of $1.60 per share on an annualized basis. It is payable on June 28 to shareholders of record at the close of business on June 3, 2013.

I recommend buying Martin Marietta Materials, Inc. (NYSE:MLM)‘s stock based on consistent growth and acceleration in the company’s earnings. Last year, EPS grew 19%. This year, it’s expected to increase by 22%, and next year by 45%. ROE of 7%, compared to the industry average of 5%, shows that the company reinvests its earnings more efficiently than its industry peers. On a P/E basis, valuation also looks attractive, as the shares currently trade at 11.8 times, a 5% discount to the industry average of 12.4.

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