aggregates for value investing

Two strong options in materials and aggregates – EXP and VMC

In this post, we will look at two options in materials that are both good picks to consider:

  • Eagle Materials (EXP)
  • Vulcan Materials (VMC)

Neither have fantastically high dividend yields but both have the look of compounders and one might be a good play for a value investor.

Eagle Materials

Eagle Materials operate in many of the US states in both aggregates and cement and wallboards and plasterboard. Their products support both residential and non-residential construction and infrastructural projects, such as highways and bridges.

They have a long history of successful capital allocation through both careful share repurchases at good prices and dividend payments. Unlike some options, in the materials, there are many firms with lower yields, like EXP. It currently yields 0.8% but has a 20% 5Y DGR. While the dividend may be paused for several years, it makes it for it with larger increases. The free cash flow payout ratio of 8.8% suggests a very safe and secure dividend payout. The operating margin and net margins are 12.2% and 10% higher than the industry, respectively, suggesting effective management and enduring profitability, coupled with the ROIC of 18.2%.

What might we expect from EXP if we invested now? The current prices are in a bit of a decline while the 2023 financial year looks to see a significant expansion of earnings (Figure 1). If we take the end of the 2025 year and the normalized P/E of 17.55x (demonstrated over the last five years, suggesting the market places a premium on this company), then if the analysts’ earnings estimates are correct and prices revert to this P/E then we might expect a 108% total rate of return, or 33.33% annualized rate of return. While the analysts’ estimates (the bottom panel of Figure 1) are relatively stable, there have been downward revisions. Further, the analyst scorecard on FAST Graphs is only at about 50% hits and beats over a two-year forward period (at a 20% margin of error).

EXP-normalized PE for value investing
Figure 1. EXP-normalized PE for value investing, showing potential rates of return (Source: FAST Graphs)

Vulcan Materials (VMC)

Vulcan Materials focuses on aggregates, asphalt, and cement. Like many in the materials industry, the business remains relatively straightforward to understand and the key to success in investing will be selecting the right time to invest.

The dividend yield is 0.9% and has a 5Y DGR of 9.9%. Their operating margins and net margin are 0.7% and -0.8% compared to the industry average, respectively, suggesting that they are effectively managed but lack the overall profitability of EXP. The ROIC is only 6.5%, much lower than EXP.

Are there good opportunities here? The FAST Graphs Analysts Scorecard shows that analysts have a 62% miss on the two-year forward estimate at a 20% margin of error, so they clearly find it difficult to forecast for this company. If we assume that the estimates are correct for the end of 2024, and prices return to a 36.43x P/E (the average over the last five years), then this would result in a 94% total rate of return or an annualized rate of return of 33%.

VMC-normalized PE for value investors
Figure 2. VMC and analysts’ estimates with a normalized PE for value investors (Source: FAST Graphs)

Final thoughts

Neither of these investments will earn significant dividend income but are more total return stories. Each of them has the potential to shine and deliver out-sized returns for value investors over the next few years. EXP would be my pick due to its stronger underlying profitability metrics and its much lower P/E at present, suggesting it is trading at a better value and with a slightly greater margin of safety. However, it still trades at a multiple higher than many value investors would be comfortable with. Either option might be viable for many dividend growth investors, although, again, EXP’s ability to execute larger dividend increases will probably be more attractive to the long-term DGI.

 

In this post, we will look at two options in materials that are both good picks to consider: Eagle Materials (EXP) Vulcan Materials (VMC) Neither have fantastically high dividend yields but both have the look of compounders and one might be a good play for a value investor. Eagle Materials Eagle Materials operate in many…

In this post, we will look at two options in materials that are both good picks to consider: Eagle Materials (EXP) Vulcan Materials (VMC) Neither have fantastically high dividend yields but both have the look of compounders and one might be a good play for a value investor. Eagle Materials Eagle Materials operate in many…

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