CRH PLC

CRH recorded 7% adjusted EBITDA growth, translating into 30 basis points of margin expansion to 24.4% during the second quarter. Full-year adjusted EBITDA guidance of between $8.1 billion and $8.5 billion was reaffirmed.

Why it matters: We remain impressed by CRH's ability to expand its EBITDA margin irrespective of the macroeconomic environment, driven by strong pricing and contributions from acquisitions, most notably in its America materials solutions segment. The division reported revenue and EBITDA growth of 10% and 12%, respectively, offsetting margin declines in its building solutions business, which is exposed to soft US residential demand. We expect the demand environment to support CRH's ability to raise prices and protect margins, underpinned by infrastructure demand. Infrastructure spending and the modernization of US highways have received bipartisan support, and the latest text from the proposed Build America, Buy America Act includes $580 billion for US highway, bridge, transit, and rail programs covering fiscal 2027 through 2031. The midpoint of full-year guidance implies that adjusted EBITDA will grow at broadly the same pace in the remainder of the year as in the first half.

The bottom line: We maintain our $105 fair value estimate for narrow-moat CRH and remain confident that the firm will deliver adjusted EBITDA of approximately $8.3 billion during fiscal 2026. Shares are fairly valued. CRH remains our preferred pick in the sector due to its exposure to multiyear US infrastructure spending, without the premium valuation of its North American pure-play peers. Still, we believe its prospects are fully reflected in its valuation.

Coming up: Management expects the $8.5 billion acquisition of Arcosa to close in the first quarter of fiscal 2027 and has paused its buyback program. We estimate pro forma net debt/EBITDA could rise to around 2.4 times after the deal, excluding any further disposals.

Active portfolio management remains a key part of the strategy for CRH. In the second quarter, 11 acquisitions were completed for a total consideration of $1.1 billion, and $1.7 billion in proceeds from divestments were generated. This excludes the definitive agreement to acquire Arcosa for $8.5 billion.

Our fair value estimate is $105 per share. We assume an 9% increase in annualized earnings per share through 2030, as a favorable outlook for US infrastructure construction spending supports revenue and EBITDA margin expansion in the medium term, and a 2% contribution from future acquisitions. Our fair value estimate implies a 17 times price/earnings multiple.

Funding certainty for US infrastructure projects and the reshoring of manufacturing activities back to the US have created a healthy price environment for building materials, contributing to record profitability metrics and rising backlogs. We assume further EBITDA margin expansion, but our 21% average EBITDA margin through 2030 falls short of management's 22% to 24% target, as we believe achieving these levels will depend on acquisitions and divestments, which are unpredictable to forecast. In fiscal 2026, we expect 7.5% adjusted EBITDA growth to $8.3 billion, within the $8.1 billion and $8.5 billion guidance provided. We expect margin improvement to be driven by margin-accretive acquisitions in the US building solutions segment and further price increases for aggregates and cement.

We forecast 7% annualized revenue growth through 2030, of which 5% is organic, with contributions from pricing and volumes. Volume growth is underpinned by federal and state funding programs, which will drive US infrastructure and nonresidential construction activity. In addition, strict regulation, which prevents new supply from being added, supports a healthy price environment for building material prices. We expect the contribution from pricing to be most meaningful in fiscal 2026, with limited scope for meaningful price increases beyond, given the notable price hikes during the last three years. CRH’s superior top-line outlook versus its European-listed peers is attributed to its material exposure to US infrastructure spending, most notably road and highway construction, which has received a 50% increase in federal funding as part of the recent $1.2 trillion Infrastructure Investment and Jobs Act. We model nearly $12 billion in acquisitions, which add roughly 2% of revenue growth per year, starting in fiscal 2027, and will be funded by free cash flow. Our forecasts fall at the lower end of management's 7% to 9% average revenue growth target through 2030, as we are conservative about the contribution from acquisitions.

We model nearly $10 billion of capital return to shareholders over the next five years, including $3.6 billion in share repurchases, which adds an incremental 1% to EPS growth.

We assign a narrow moat rating to CRH, obtained through difficult-to-obtain regulatory permits (intangible asset) required to produce cement and aggregates. Once a quarry or cement kiln is operating in a region, the producer of building materials tends to have a regional monopoly, as the high weight/price ratio of aggregates and cement prevents materials from being transported long distances economically, creating strong pricing power. Opportunistic acquisitions and the divestments of its distribution businesses have tilted CRH’s revenue mix toward heavy building materials, which exhibit high barriers to entry. Historically, goodwill acquired from acquisitions has diluted returns on invested capital (including goodwill); however, returns have exceeded the weighted average cost of capital since 2023, and we expect this to persist, given the long-dated nature of assets purchased.

CRH owns over 1,200 aggregate quarries or cement pits, of which over 80% are located in North America or Western Europe. An existing quarry or cement pit faces a low threat of new entrants due to a lengthy permit approval process before the construction of a facility can begin, often taking up to 10 years from the acquisition of the land until materials are sold. Stringent environmental and zoning regulations mean it is unlikely for a competing quarry to encroach on an incumbent’s existing operations. A variety of operating permits from local, state, and federal governments are required due to the significant environmental and noise pollution inherent in producing aggregates and cement. Not-in-my-backyard opposition from local communities is an additional hurdle that manufacturers must overcome throughout and beyond the permit application process, which can further extend the approval process and likely influences regulators’ reluctance to grant new permits.

Once an existing kiln or quarry is present in a region, the likelihood of authorities permitting additional capacity is low. Obtaining permits is more challenging in developed markets, where regulatory requirements are typically more stringent due to environmental concerns and Nimby opposition, particularly in highly populated, large urban areas, which have the greatest demand for construction. We see evidence of high barriers to entry and reluctance to new approvals through the stable cement capacity in the US, CRH’s largest geographic market, despite an increase in demand. US cement capacity has remained essentially unchanged at 129 million metric tons between 2016 and 2024, despite consumption increasing 16% during the same period.

The presence of regulatory permits enables manufacturers to enjoy a transportation cost advantage via favorable geographical proximity to customers, which minimizes the threat of distant competitors and lends itself to regional monopolies. The high weight/value ratio of building materials prevents goods from being transported economically over vast distances. A metric ton of aggregates sells for $15 and a metric ton of cement for $130. Therefore, it is uneconomical to transport aggregates and cement via road further than 50 and 150 miles, which is the most common form of shipping. Freight costs represent one of the largest cost items for manufacturers, and a competitor would erode its profits by transporting the materials over longer distances, as the costs incurred would exceed the sales value of the materials. While bulk shipping or rail provides a cheaper transportation method, it is only available in areas with suitable logistical infrastructure (seaborne access is another requirement) and still usually requires trucks to reach the final destination. Historically, import duties on cement and clinker have also been imposed to protect against dumping from other countries in cases of oversupply or lower environmental standards of production, which reduces the threat of global competition.

The US is CRH’s largest geographic contributor, generating approximately 75% of group EBITDA. We view the US as having strict permit requirements and a limited threat to seaborne imports. The favorable regulatory environment is reflected in improving cement utilization rates in the US, which have increased from 75% in 2012 to over 85% in 2024. In contrast, regions with lighter regulatory restrictions, such as China, have witnessed increasing supply and lower utilization rates that were closer to 50% in 2023. High barriers to entry have also supported resilient price increases for cement and aggregates. US aggregates’ pricing has exceeded inflation in nine of the last 10 years, and cement has done so in seven of the last 10 years, reflecting the strong pricing power of upstream materials. We attribute this to robust demand in the US, underpinned by infrastructure construction demand, limited substitute products, and high barriers to entry.

CRH operates via a vertically integrated model, utilizing its aggregates and cement supply as the primary inputs to produce asphalt (used for road construction) and concrete (used for most construction projects). While we don’t view either of these materials as having a moat on a stand-alone basis, vertical integration can complement heavy material businesses by providing a distribution channel for their in-house-produced upstream materials. Therefore, despite being margin-dilutive, selling ready-mixed concrete, asphalt, and paving services can still be value-accretive via greater dollar margin capture through the value chain and improved cash conversion, given the low levels of incremental capital needed.

Similarly, CRH's outdoor living segment, which comprises concrete masonry and pavers that are sold to contractors or via retailers such as Home Depot and Lowe’s, is mostly stone-based and in-sources the majority of materials.

As the largest roadbuilder in North America, CRH is well positioned for a rise in public infrastructure projects underpinned by the $1.2 trillion Infrastructure Investment and Jobs Act, which will see a 50% increase in federal highway funding and remains mostly uninvested so far.

Bipartisan approval for the proposed reauthorization of a new infrastructure funding program in the US will provide a healthy pricing environment in the medium term.

A highly fragmented US aggregates industry and CRH's healthy balance sheet offer ample room to participate in industry consolidation.

Demand for privately funded construction projects is exposed to a shift in the economic environment and higher interest rates.

Significant price increases during the past few years for building materials may limit customer tolerance of further hikes, which may impact CRH's ability to further expand its EBITDA margin in the future.

Additional government funding might not be immediately converted into near-term construction volume growth due to labor constraints, cost inflation, and political delays.