Position Update: VMC

Here’s the bear case for Vulcan Materials Company [[VMC]] :

The company is a producer of asphalt, concrete and cement in a depressed U.S. construction environment.

Major inputs include diesel fuel and liquid asphalt. Both have soared in recent months.

In addition, the company levered up into a downturn and acquired Florida Rock (think Florida real estate), effectively making matters worse. Not only is Florida Rock a drag on them, from an operating standpoint, but they are laden with debt because of it. Currently, VMC has over $3.5 billion in debt.

VMC will get hit hard when municipalities cease their infrastructure projects, due to high material cost. The fact of the matter is, most municipalities are unprepared for the inflationary storm, about to hit their tax payers. Most, if not all, pegged their budgets to the erroneous cpi index, which does not reflect the mind numbing (double digit) increases in raw materials. In short, cities and states will be forced to delay or cancel numerous projects. That will be a huge blow to VMC.

via VMC‘s earnings report:

“Our earnings outlook reflects a prolonged downturn in residential construction, weakness in non-residential and highway construction activity and energy-related costs remaining at the current high levels. Leading indicators such as contract awards weakened in most construction categories in the second quarter. We now estimate full year aggregates shipments, including Florida Rock operations for the full year, to be down 2 to 5 percent versus the prior year.

“During this time of weaker demand, our focus is on those aspects of the business we can control. During the first half of this year, we have reduced operating hours, maintained relatively flat unit variable production costs excluding energy-related costs and decreased cash fixed costs. We will continue aggressively managing costs in all areas. We expect higher selling prices for our products to help offset the earnings effects of lower volumes and higher energy-related costs. For aggregates, we continue to expect full year price improvement of approximately 8 percent.

Regarding valuation:

Their peers include Martin Marietta Materials, Inc. [[MLM]] , Texas Industries, Inc. [[TXI]] and Eagle Materials, Inc. [[EXP]] .

VMC is a repeat offender of missing earnings estimates, as demand and cost controls hit the company hard from every angle.

Their new guidance is for a profit range of $2.85-$3.25. However, I am very skeptical they can even hit that bottom number. I do not believe they are anticipating a drastic slowdown in municipal spending.

However, let’s say they hit $2.85. At current levels, that gives them a PE of 24. The average PE for their peers is 15x. However, that’s assuming they will hit their numbers too, which they will not.

At 15x 2009 earnings, VMC should be trading at $42. If their numbers come in short, due to a further economic slowdown, I believe the stock should trade 10x 2009 earnings or $28.

The only way VMC comes out smelling like roses is if residential real estate upticks, diesel fuel and liquid asphalt drop or the government implements an “infrastructure bailout,” allocating money to the construction of highways, bridges and tunnels.

In short, I believe none of that will occur and the stock is 36% overvalued, at current levels. With 20 million shares sold short or 18% of the float, expect large swings in the stock. Nonetheless, there is no fucking way this stock deserves to be up today, recovering from an early 6 point deficit.

Disclaimer: I am short egregious amounts of VMC.

NOTE: The conference call begins at 11 am, eastern.

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