Vulcan Materials (VMC)

Construction materials company Vulcan Materials (NYSE:VMC) missed Wall Street’s revenue expectations in Q1 CY2025, but sales rose 5.8% year on year to $1.63 billion. Its non-GAAP profit of $1 per share was 31.6% above analysts’ consensus estimates.

Company Overview

Founded in 1909, Vulcan Materials (NYSE:VMC) is a producer of construction aggregates, primarily crushed stone, sand, and gravel.

Traditionally, building materials companies have built competitive advantages with economies of scale, brand recognition, and strong relationships with builders and contractors. More recently, advances to address labor availability and job site productivity have spurred innovation. Additionally, companies in the space that can produce more energy-efficient materials have opportunities to take share. However, these companies are at the whim of construction volumes, which tend to be cyclical and can be impacted heavily by economic factors such as interest rates. Additionally, the costs of raw materials can be driven by a myriad of worldwide factors and greatly influence the profitability of building materials companies.

Competitors in the construction materials industry include Martin Marietta (NYSE:MLM), Eagle Materials (NYSE:EXP), and CEMEX (NYSE:CX)

A company’s long-term sales performance can indicate its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Luckily, Vulcan Materials’s sales grew at a decent 8.5% compounded annual growth rate over the last five years. Its growth was slightly above the average industrials company and shows its offerings resonate with customers.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Vulcan Materials’s recent performance shows its demand has slowed as its revenue was flat over the last two years.

We can dig further into the company’s revenue dynamics by analyzing its number of tons shipped, which reached 47.8 million in the latest quarter. Over the last two years, Vulcan Materials’s tons shipped averaged 3.2% year-on-year declines. Because this number is lower than its revenue growth during the same period, we can see the company’s monetization has risen.

This quarter, Vulcan Materials’s revenue grew by 5.8% year on year to $1.63 billion, missing Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 11.2% over the next 12 months, an improvement versus the last two years. This projection is commendable and suggests its newer products and services will spur better top-line performance.

All else equal, we prefer higher gross margins because they make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.

Vulcan Materials has bad unit economics for an industrials company, giving it less room to reinvest and develop new offerings. As you can see below, it averaged a 24.9% gross margin over the last five years. That means Vulcan Materials paid its suppliers a lot of money ($75.12 for every $100 in revenue) to run its business.

In Q1, Vulcan Materials produced a 22.3% gross profit margin, up 2.6 percentage points year on year. Vulcan Materials’s full-year margin has also been trending up over the past 12 months, increasing by 2 percentage points. If this move continues, it could suggest better unit economics due to more leverage from its growing sales on the fixed portion of its cost of goods sold (such as manufacturing expenses).

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Vulcan Materials has been a well-oiled machine over the last five years. It demonstrated elite profitability for an industrials business, boasting an average operating margin of 17.2%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Analyzing the trend in its profitability, Vulcan Materials’s operating margin decreased by 2.3 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q1, Vulcan Materials generated an operating profit margin of 13.9%, up 2.7 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Vulcan Materials’s EPS grew at a solid 10.4% compounded annual growth rate over the last five years, higher than its 8.5% annualized revenue growth. However, we take this with a grain of salt because its operating margin didn’t expand and it didn’t repurchase its shares, meaning the delta came from reduced interest expenses or taxes.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

Vulcan Materials’s two-year annual EPS growth of 20.4% was fantastic and topped its flat revenue.

In Q1, Vulcan Materials reported EPS at $1, up from $0.80 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Vulcan Materials’s full-year EPS of $7.74 to grow 8.4%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Vulcan Materials has shown robust cash profitability, enabling it to comfortably ride out cyclical downturns while investing in plenty of new offerings and returning capital to investors. The company’s free cash flow margin averaged 10.2% over the last five years, quite impressive for an industrials business.

Taking a step back, we can see that Vulcan Materials’s margin dropped by 5.6 percentage points during that time. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal increasing investment needs and capital intensity.

Vulcan Materials’s free cash flow clocked in at $83.5 million in Q1, equivalent to a 5.1% margin. This result was good as its margin was 3.8 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends are more important.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Vulcan Materials historically did a mediocre job investing in profitable growth initiatives. Its five-year average ROIC was 9.3%, somewhat low compared to the best industrials companies that consistently pump out 20%+.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Vulcan Materials’s ROIC has stayed the same over the last few years. If the company wants to become an investable business, it must improve its returns by generating more profitable growth.

Vulcan Materials reported $181.3 million of cash and $5.46 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $2.14 billion of EBITDA over the last 12 months, we view Vulcan Materials’s 2.5× net-debt-to-EBITDA ratio as safe. We also see its $190.9 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly Vulcan Materials blew past analysts’ EPS expectations this quarter. We were also glad its EBITDA outperformed Wall Street’s estimates. On the other hand, its revenue missed. Looking ahead, its full-year EBITDA guidance was in line with Wall Street’s estimates. Overall, this quarter was mixed but still had some key positives. The stock traded up 3% to $252.50 immediately following the results.

Updated: May 16, 2025 at 11:47 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Vulcan Materials, you should also grasp the company’s longer-term business quality and valuation.

Vulcan Materials’s business quality ultimately falls short of our standards. Although its revenue growth was good over the last five years and is expected to accelerate over the next 12 months, its cash profitability fell over the last five years. And while the company’s impressive operating margins show it has a highly efficient business model, the downside is its declining operating margin shows the business has become less efficient.

Vulcan Materials’s P/E ratio based on the next 12 months is 32.9x. This multiple tells us a lot of good news is priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $292.33 on the company (compared to the current share price of $275.51).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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