Invest in Martin Marietta Materials

Martin Marietta Materials, Inc. (MLM), the second largest producer of aggregates for the construction industry in the United States, supplies crushed stone, sand, gravel and other aggregate products for use in domestic construction of highways and other public infrastructure as well as for nonresidential and residential building development. Operating on a cost-efficient business model, the company and its employees remain focused on upholding their core fundamentals: strict cost control, prudent use of resources and commitment to safety (link). Successful execution of their financial and operational strategies, which include prudent capital deployment for strategic acquisitions and sustained dividends, allowed the company to not only outperform its competitors but also enhance its long-term shareholder value (link). Only recently, the company made an unsuccessful $4.8 billion takeover bid for its main rival, Vulcan Materials Company (VMC) (link).  

Martin Marietta Materials operates in four business segments namely, the Mideast Group, Southeast Group, and West Group, collectively the Aggregates Business, and the Specialty Products segment. Through the Specialty Products segment, the company also engages in the production and sale of magnesia-based chemical products for industrial, agricultural and environmental application; and dolomitic lime primarily for the steel industry. (link)

 The company’s annual net sales and earnings are predominantly derived from its Aggregates business. With a network of over 285 quarries and distribution facilities, its Aggregates business spans through 27 states, Canada, the Bahamas and the Carribean Islands. The company considers its strategic locations as its major strength. This, along with competitive pricing and dedicated employees, quality products and superior customer service, distinguishes them from rivals in the industry.(link)

The decline in overall construction activity in the United States along with severe weather patterns appeared to have contributed to the reported 9.3 percent decrease in aggregates volume in the results for the second quarter of 2011 (link). The significant decrease in volumes produced a negative effect in the company’s operating profit. In the company’s conference call for this quarter, Martin Marietta Materials President and CEO, Ward Nye, however, said that despite the decline, he remained pleased with the company’s performance in such a difficult operating environment. The company, indeed, performed well with a 2.6% increase in aggregates prices and a 2.5% decrease in direct aggregates production costs. Furthermore, the Specialty Products business, with the strong demand for both the chemicals and dolomitic lime product lines, performed exceptionally well with net sales of $49.6 million, an increase of 3.6% over the prior-year quarter. (link) These results reflect the company’s focus on cost control. 

In the same quarter, the company acquired an aggregates, asphalt and ready mixed concrete business in San Antonio. San Antonio’s population and economic growth has, over the past five years, outperformed comparable national results. The acquisition followed one of the company’s strategic aims: “to identify geographic areas with long-term, attractive demographics and to deploy our capital when we can establish or maintain leading market positions in a business that we understand and operate exceptionally well.” (link) 

Despite the prolonged economic recession, Martin Marietta Materials remained consistent in terms of pricing growth and cost control. According to the results of the third quarter of 2011 (link), there was a 2.8% increase in aggregates product line pricing despite a slight decline in aggregates shipment. This is the third consecutive quarter of aggregates pricing growth for the company. Better still, the company was able to decrease the aggregates production cost slightly despite a 16% increase in non-controllable energy costs.  The Special Products segment exceeded the company’s expectations by producing net sales of $50.4 million, an increase of $8.1 million or 19% over the prior-year quarter. This is a new quarterly record for net sales in the segment and resulted in $15.6 million earnings from operations.

A decrease in cash from operating activities of the company for the nine months ended September 30, 2011 was observed. From $202.6 million for 2010, the operating cash flow dropped to $179.9 million. The company attributed this decline to the lower net earnings in 2011. As of September 30, 2011, the company’s ratio of consolidated debt to consolidated EBITDA is 3.07 times. This complies with the limit of 3.5 times. (link)

Martin Marietta Materials remains focused on business development. Also in the third quarter, the company signed a definitive agreement with Lafarge North America Inc. The agreement declared the exchange of certain assets between the two companies(link). Recently, the company proposed an aggressive $4.8 billion takeover bid for its main rival, Vulcan Materials (VMC) (link).Vulcan Materials, however, rejected the offer (link). 

Due to several uncontrollable factors like the economic downturn and gas prices, the company finds it difficult to predict future performance.  However, despite the expected decrease in shipments, the company maintains a positive sales outlook for the year with a predicted increase ranging from 2% to 4%. (link) 

Martin Marietta Materials maintains its place as the second largest aggregates producer. Its main competitors include Vulcan Materials (VMC), Texas Industries (TCI), Lafarge North America Inc., and Lehigh Hanson Inc. (link)