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  • The nation's roads and bridges are in disrepair.
  • $110 billion in Federal funds is flowing to states and communities to rebuild them.
  • Demand for Vulcan Materials' aggregates, concrete, and asphalt should increase meaningfully as projects ramp.

When you’re hunting stocks to buy, it can help to focus on stocks with strong tailwinds supporting revenue and profit growth. These tailwinds can take different forms, but one example is focusing on stocks likely to benefit from increased spending associated with the Infrastructure Investment and Jobs Act.

The Act was signed into law last November, and spending should accelerate next year, supporting various construction companies, including Vulcan Materials  (VMC) . Vulcan Materials is one of the largest providers of aggregates used to build roads, bridges, and airports, so it should see its top and bottom-line increase nicely over the next two years.

In “We're Trimming One Stock to Initiate Coverage of Another,Action Alerts PLUS portfolio managers Bob Lang and Chris Versace explain why they added Vulcan Materials to AAP’s holdings this week.

They write:

“[Because of] building roads, highways, foundations, airport runways, and other pieces on infrastructure, concrete and aggregates (gravel, crushed stone, and sand) that can be mixed with cement and asphalt should also see a pick-up in demand…By the numbers, roughly three-quarters of Vulcan's revenue is derived from aggregates with the balance roughly split between asphalt and concrete. As the multi-year spending tied to the Biden Infrastructure Bill kicks in, Vulcan's top line is expected to rise more than 50% to $8.5 billion in 2024 vs. $5.55 billion in 2021 while the consensus view has its EPS soaring roughly 80% higher to ~ $9.15 in 2024 vs. $5.04 in 2021.”

Supporting analysts' expectations for significant revenue and profit growth is a widespread need to fix America’s arguably crumbling highways and byways. Many roads and bridges were constructed decades ago because of Eisenhower’s Federal Aid Highway Act of 1956. However, after years of neglect, 1 in 5 miles of highways and 45,000 bridges are in poor condition.

The Infrastructure Investment and Jobs Act aims to fix the problem with $110 billion for road and bridge repair. These dollars are already heading to states and municipalities, bids are being sought and approved, and work should begin in earnest next year. As demand for aggregates, concrete, and asphalt accelerates because of these projects, Vulcan should capture its fair share of the business. If so, its shares could benefit from multiple expansion.

Back to Lang and Versace:

“VMC shares peaked near $141 in early 2018, trading at ~35x expected 2018 EPS. That's also the average PE multiple VMC shares peaked at over the 2018-2022 period, ranging from a low of 32x to a high of just over 40x. By comparison, VMC shares are currently trading at 32.7x expected 2022 EPS of $5.46 but as the infrastructure tailwind picks up speed, translating into rising revenue, margins, and EPS for Vulcan, we could see the shares return to that average peak multiple as we move further past the initial stages.”

If investors value earnings similar to the past, it could represent a sizeable return for new buyers. Shares currently trade at about $178; however, Lang and Versace note that averaging “expected EPS over the 2022-2023 period…equates to $6.35, and applying the 35x multiple to it derives a price target of $222.” If shares climb to AAP’s $222 target, investors will pocket a 25% return.

There aren’t any guarantees, but investors don’t appear to be taking on tremendous risk by buying here or, if there’s a pullback, at lower prices.

Lang and Versace write, “VMC shares bottomed out at an average P/E multiple of 23.5x over the last five years…taking the conservative route, against that blended 2022-2023 EPS figure, we see the downside to roughly the $150 level. On a risk-to-reward basis, that means we see a net upside potential less potential downside of 8%.”

That’s enough risk to reward for them to begin building a position. Initially, the duo is allocating 1% of AAP’s portfolio to Vulcan Materials, and they plan to buy more when opportunities arise.

Vulcan Materials also pays a modest dividend if you’re looking for another reason to follow in AAP’s footsteps. The dividend is $0.40 per quarter, so shares yield about 0.9%. Given the potential revenue and profit growth, Lang and Versace wouldn’t be shocked if that dividend heads higher in the coming years.

The Smart Play

It’s not outlandish to think Vulcan Materials could trade up to AAP’s target. Sure, it would represent an all-time high for the stock, but shares were trading above $210 per share as recently as January, before the stock market sell-off this year.

Their earnings outlook isn’t crazy, either. Vulcan Materials' annual EPS clocked in between $9.06 and $14.10 per share from 2016 through 2019. It also produced a respectable $4.70 in EPS in 2020, despite COVID lockdowns. If commodity prices and, broadly, inflation continue to retreat, earnings leverage could outpace expectations, particularly if recent price increases in aggregates, concrete, and asphalt prove sticky.

It’s also important to note that even though infrastructure spending isn’t expected to really begin kicking in until next year, Vulcan Materials volume is still up mid-single-digits this year. Plus, while inflation has been a headwind, the company’s price increases are recently outpacing it, resulting in margin expansion at the tail end of the second quarter. During the company’s second-quarter earnings call, management said, “We saw an inflection point in the second quarter. Margins were back in growth in May, kind of low single digit, then they grew to mid-single digit in June. So margins are in expansion mode. And then we're going to have mid-year price increases. So pricing is now outpacing inflation.”

GIven the tailwind from infrastructure spending to revenue, recent price increases and potentially slowing inflation support earnings, and valuation suggests the possibility of double-digit returns, you might want to follow AAP’s lead and begin a starter position in Vulcan Materials.

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