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Construction Materials Are For Later: Vulcan Materials Company (VMC), Martin Marietta Materials, Inc. (MLM)

Producers of the material that we use to build our fancy civilizations might not be having the easiest time. Growth is up, but construction and building activities are still in a depressed state. That is not surprising since the last meltdown was focused around construction, housing et al., and the financial markets. You have the government and the Fed rushing to help financials line their pockets, but who remembers the lowly producer of aggregates? You and I might, but we’re smarter. Maybe.

Vulcan Materials Company (NYSE:VMC)

Losing Was Probably a Victory

Martin Marietta Materials, Inc. (NYSE:MLM) attempted a hostile takeover of Vulcan Materials Company (NYSE:VMC), because retro is in and a hostile takeover is so 80s. It is probably for the best that the bid failed. Being huge has its benefits, but the pain of such a joining would be pretty massive. Vulcan has a bit more revenue than Martin Marietta, which would mean that the healthier, but smaller company tried to grab the larger company that is not doing as well.

The synergies never really materialize according to the rosy projections. Even the worst case scenarios are rosy, because no one discusses complete utter failure as a possibility. There may be no way to know for sure, but I am comfortable with my assumption that the worst case scenario is rarely the worst case.

That the takeover was hostile was probably another reason it is good the deal failed. I think MLM would have ended up paying too much. If not before the fact, then definitely after the fact. Few combinations go smoothly, whether it is redundant assets or incompatible corporate cultures. All-in-all this failure at a hostile takeover should be treated as a neutral if not positive event. Martin Marietta might continue its quest for Vulcan Materials Company (NYSE:VMC), but from a friendly position instead of a hostile one. I think Martin Marietta Materials, Inc. (NYSE:MLM)should just buy the assets it wants as Vulcan sells them.

Cash Is Not King Here

I generally like companies to have a strong cash balance. I looked at a few competitors to Martin Marietta and with the exception of Vulcan they do not have a lot of cash. This includes Martin Marietta. That is why I have to remind myself that construction is for later not now, and that the companies are profitable. Coupled with the fact that they have a debt-to-equity ratio below 1 means that there is some debt available to the company should any issues arise.

Martin Marietta Materials, Inc. (NYSE:MLM) has $25M in cash, while Vulcan Materials Company (NYSE:VMC) has $275M. Vulcan has losses so it is probably good for them that they have cash. Eagle Materials, Inc. (NYSE:EXP) is an industry peer, in a manner, and it has even less cash at $9M, but it is also profitable. Set Vulcan Materials Company (NYSE:VMC) to the side because it is losing money while the near-term outlook for the industry remains volatile and soft, and turn to Eagle and Martin Marietta.

Eagle is the smaller company by revenue. Normally, I would be looking at the smaller company to be able to make the biggest strides, but the two companies are not that far apart by market cap. Eagle does have a token dividend with a yield of 0.60%. With the low cash position and light earnings it is easy to understand why the company has such a low dividend.

Try Both, Each Company Has Their Focus

Martin Marietta Materials, Inc. (NYSE:MLM) produces aggregates, which would be cement, concrete, asphalt, or any component of these things. If you want to pour foundation or build a thick-walled bunker for the coming zombie apocalypse, then you might consider Martin Marietta’s products. Eagle Materials makes things like wall and floor boards, which are used in houses. Everyone remembers housing as the industry that almost castrated the global economy. Well the beast is rising again. It will be a slow recovery, which means you have some time to ponder an investment in Eagle, but the last few quarters have shown some good improvement.

Martin Marietta Materials, Inc. (NYSE:MLM) was upgraded/initiated by Goldman. Since I think the broad construction recovery will take some time to materialize and get into high gear, I am not going to hold the upgrade against the company. Normally, I would be unhappy with upgrades. Both Eagle and Martin Marietta have flown up recently, and I would wait for any push downward before contemplating a position. It happened so fast, and the stocks were far lower during my initial draft. Since I take a long view, I do not mind waiting for some decline. The goal for the companies keep selling their products, and stay afloat till things improve to the point that some real money can be made.

The Road Ahead

Do not let the political brinksmanship in Washington deter you from the industry. The impact of spending cuts will be felt, but America is crumbling. Soon it will not just be a hassle to have horrible roads, bridges, and rails. It will rapidly become an issue of strangling economic growth. If it still is not taken care of, then it will be an issue of public safety. All it will take is one bridge collapse, tunnel collapse, or elementary school kid tripping on a broken sidewalk to set the public on fire. With the right media coverage.

Spending cuts or not, infrastructure is one of the most fundamental duties of the government. Creation of public goods is the purpose of government. Infrastructure is a public good and during peacetime is more important than defense in some respects. Eventually something will rouse the nation to deal with the infrastructure problem. Martin Marietta will probably benefit in that case.

People will need houses though, and Eagle will eventually benefit from home-building and renovating. There is not a pressing need for homes right now, so going heavier in position size for Martin Marietta Materials, Inc. (NYSE:MLM) might be the better option.

The article Construction Materials Are For Later originally appeared on Fool.com and is written by Nihar Patel.

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