Vulcan Materials

We are transferring coverage of US building materials companies Vulcan Materials, Martin Marietta, and Amrize. The companies produce aggregates, cement, ready-mix concrete, and other building materials used across infrastructure, nonresidential, and residential construction.

The bottom line: We are increasing our fair value estimates for Vulcan to $238 per share from $198 and Martin Marietta to $496 per share from $440, while lowering our fair value estimate for Amrize to $42 per share. We are also upgrading our moat ratings for Vulcan and Martin Marietta to wide and maintaining our narrow moat rating for Amrize. Our moat upgrades reflect our confidence in the visibility and durability of cash flows generated by their aggregate businesses. High barriers to entry constrain new quarry development, while aggregates’ low value-to-weight ratio makes transportation over long distances uneconomical, creating highly localized markets. Within these localized markets, Vulcan and Martin Marietta benefit from strong positions. Aggregates are essential to construction with no substitutes, and the limited ability to source material from farther away reduces competition and supports sustained pricing power.

Long view: We expect a favorable construction backdrop to support aggregates demand over the medium to long term, with public infrastructure spending providing a relatively stable base of activity and large-scale nonresidential projects adding incremental growth. The Infrastructure Investment and Jobs Act has provided a meaningful tailwind to construction activity, with more than $350 billion authorized for highways and bridges. A significant portion of this funding remains to be deployed, while policymakers are also working on a successor transportation bill which could extend this supportive spending environment beyond the current program. We also expect continued investment in data centers and manufacturing to support nonresidential construction activity.

We are increasing our fair value estimate to $238 per share from $198, primarily reflecting our moat upgrade. Our fair value estimate equates to 26 times our 2026 adjusted earnings per share.

We see solid growth and profitability over our 10-year forecast, with consolidated sales growing at a roughly 6% compound annual rate and operating margins reaching around 25% by the end of our forecast period. We expect demand growth to be supported by infrastructure and nonresidential construction activity. Federal infrastructure funding has supported elevated highway construction spending, and Vulcan is also well positioned in states with healthy state transportation budgets. Its largest states by revenue—California, Texas, Georgia, and Tennessee—have also generally experienced strong population and employment growth, supporting good residential construction demand over the long term. Private nonresidential construction should provide an additional source of demand, particularly from data centers, power generation, and manufacturing investment. Together, these factors support our expectation for 3% average annual aggregate volume growth. Local supply and strong market positions should allow pricing to increase around 4% annually and continue outpacing cost inflation over the long term.

Beyond our explicit forecast period, our stage two assumptions incorporate a 16.7% return on new invested capital and 5% annual earnings before interest growth for the following 10 years.

We are upgrading Vulcan's Morningstar Economic Moat Rating to wide from narrow, and we expect the firm to generate returns above its weighted average cost of capital for at least the next 20 years. The moat is primarily supported by its aggregates business, where difficult-to-obtain regulatory permits limit new supply and the product’s low value to weight ratio restricts how far it can be economically transported. Together, these factors create highly localized markets with limited competition and strong pricing power.

Aggregates currently account for around 75% of the company’s revenue and Vulcan supplies aggregates through a network of approximately 425 aggregate sites. Aggregates are heavy, low value to weight raw materials extracted by drilling and blasting rock from quarries or pits, then crushing, screening, and washing the material into graded sizes for sale. Quarry owners benefit from high barriers to entry because opening a new site requires extensive permitting and regulatory approvals. Approvals have become increasingly difficult, and the process can take up to 10 years from land acquisition to the first sale of materials. Opposition from local communities can further delay or prevent new development. These barriers significantly limit the addition of new capacity in established markets. With quarry lives typically spanning over 50 years, an existing permit can protect an incumbent's market position for decades. We view these difficult-to-obtain permits as an intangible asset moat source for aggregate producers.

Aggregates generally sell for around $20 per ton, making transportation costs significant relative to the value of the product. Trucking, the most common form of transportation, typically becomes uneconomical beyond 50 miles because hauling costs can exceed the cost of the stone itself. Since these freight costs are generally passed on to customers, buyers have a strong incentive to source from nearby quarries. This creates highly localized markets and, in some cases, producers operate as virtual monopolies within their service areas. So, a transportation cost advantage can arise from proximity to customers. This market structure provides producers with meaningful pricing power and has allowed them to consistently raise prices above inflation in 30 over the last 33 years.

Aggregates also have no substitutes and represent a relatively small portion of total construction costs, ranging from roughly 2% for residential construction to about 10% for roads. As a result, customers are relatively insensitive to modest price increases, particularly given the much larger cost of switching to a more distant supplier.

Acquisitions are the primary way Vulcan expands its operations. Over the past 10 years, the company has completed more than 30 acquisitions, encompassing over 75 aggregates quarries and sales yards. Given the difficulty of developing new quarries, acquiring an existing permitted operation is often the most practical way to enter attractive local markets or strengthen an existing market position. Acquisitions can also increase Vulcan’s concentration within markets where it already operates, which can strengthen pricing power and support higher margins. While this strategy can weigh on reported return on invested capital by increasing the company’s invested capital base, we do not believe it weakens the economics of the underlying quarry assets.

We assign no moat to Vulcan’s ready-mix concrete and asphalt businesses, as both are downstream products that are more commoditized and have significantly lower barriers to entry. A ready-mix concrete business requires a batching plant and a fleet of delivery trucks, and the relatively low capital required to enter the market results in a larger number of competitors that typically compete on price and service reliability. Similarly, asphalt plants require substantially less capital than aggregates quarries and are generally easier to establish.

Acquisitions help strengthen pricing power and local presence in a region, and improve margins subsequently.

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

Permitting constraints and high transportation costs limit new aggregate supply in local markets, supporting the durability of Vulcan’s pricing power and margin expansion.

A smaller or delayed successor to current federal infrastructure funding, or weaker funding in Vulcan’s key states, could weigh on aggregate demand.

Vulcan's earnings can be affected by factors outside its control, including adverse weather conditions, which can delay construction activity and reduce shipments.

Paying high multiples for acquisitions could limit the returns generated on acquired assets, even when the underlying businesses are attractive.