2023-12-07 10:38:44 ET
Summary
- Martin Marietta Materials is rated Hold today, agreeing with the SA quant system but more cautious than Wall Street's bullish sentiment.
- Some positive drivers are revenue and earnings growth, growth in the construction of manufacturing facilities, and improving equity as debt and interest expense drops.
- Some headwinds include a lackluster dividend yield, along with somewhat overvaluation.
Company Snapshot
Today's research note climbs into the construction materials sector with coverage of Martin Marietta Materials ( MLM ) , the North Carolina-based company whose stock trades on the NYSE and is over a century old.
A few relevant facts about this company are that it is part of the S&P500 index, is a leading supplier of building materials such as concrete, and has operations across 28 US states.
In a sentence, it is one of the behind-the-scenes players that help make a building or home construction possible.
Total Rating Score
Based on the score total in today's note, I'm rating this stock a hold.
Comparing my rating to the consensus on Seeking Alpha today, my rating is aligned with the consensus from the SA quant system, but not as bullish as Wall Street or analysts.
Martin Marietta - rating consensus (Seeking Alpha)
Rating Methodology
My simplified and straightforward 8-point approach focuses on a few core areas such as revenue and earnings growth, dividend income opportunity, undervaluation opportunity, a share price presenting a value-buying potential, and identifying a key risk of the company as well as its potential impact to an investor, focusing on data from key accounting statements like the income statement and balance sheet.
Top-Line Revenue YoY Growth
I am looking for any positive revenue growth on a YoY basis, and here is what I found:
From income statement data , we can see that this company achieved $1.99B in total revenues in the quarter ending September, vs $1.81B in Sept 2022, a nearly 10% YoY gain.
Looking forward, however, what interests me is data showing expected demand growth for construction materials. The company's own Q3 earnings results commentary by the CEO provided confidence in this regard:
The results for the quarter and through nine months underscore our confidence that Martin Marietta will continue to outperform in the near-, medium- and long-term as we benefit from our business-mix portfolio and carefully curated coast-to-coast footprint. Specifically, we see increased investment in large infrastructure and manufacturing projects across the United States.
These positive trends provide an attractive counter-balance to the slowing in warehouses, private light nonresidential and residential construction, which have been impacted by tightening credit conditions.
So, in the revenue category, I am adding a point to the buy side, expecting the pipeline of work for this company going forward to have enough tailwinds.
Net Income YoY Growth
I am looking for any positive net income growth on a YoY basis, and here is what I found, also from income statement data :
In the quarter ending September the company saw $417MM in net income (earnings), vs $295MM in Sept 2022, a 41% YoY gain.
One item I keep track of is rising or falling interest expenses, which can impact the income statement. In the case of this company, interest expenses fell in the quarter ending September to around $41MM vs around $43MM in Sept 2022, which is nearly a 5% YoY decline. Incidentally, in that same period, the balance sheet shows a 9% YoY decline in long-term debt.
Looking forward, my sentiment is positive and am bullish in this category as the company has upgraded its FY23 outlook for net earnings and EBITDA, according to their Q3 presentation :
Dividend 10 Year Growth
I am looking for dividend 10 year growth trends, and here is what I found:
The above chart shows a nice dividend growth trend over 10 years, indicating financial strength and ability to return capital back to shareholders. As a dividend-oriented investor, I can see also from their history that they have steady quarterly payouts so far, though not a guarantee of future dividends of course.
Its annual dividend in 2013 of $1.60 grew to $2.54 by 2022, a 59% growth over 10 years.
This time of dividend growth trend would put it in a strong buy category, in my opinion.
Dividend Yield Above Average
I am looking for a dividend yield above its sector average, and here is what I found:
The above dividend yield chart compares my focus stock against two other US-based peers in the construction materials space, Vulcan Materials ( VMC ) and Summit Materials ( SUM ).
Of the three, it appears that Summit does not pay a dividend at all, and the other two have a trailing yield of below 1%.
So, even though the quarterly dividend payout for Martin is now $0.74 a share, I also want to consider the share price which is well over $400/share.
When it comes to dividend yield, I will pass on this one as a buy and put a point in the sell section of my score.
Share Price vs 200-day Average
My portfolio strategy prefers dip-buying opportunities when the share price falls below the 200-day simple moving average , so here is what I found:
Although the company has achieved positive revenue, earnings, and dividend growth, I am also looking at the current share price of $459.29 which is +11% above the 200-day simple moving average, and also way above its March lows that hovered around $320, as you can see in the YChart above.
Though a company with solid fundamentals, I don't think it is a great buy opportunity at this price but perhaps a sell or a hold.
If you also compare vs the March lows, it is now at a gain of around $139/share, so if I had bought around the March low then now I would likely be looking to sell at a gain and redeploy that capital into a few stocks paying +5% dividend yield.
So, in this section, a point goes in the sell column.
P/E Valuation vs Average
I am looking for an undervaluation opportunity when it comes to price-to-earnings , and here is what I found from valuation data :
The forward P/E ratio of 25.30 is 52% above the sector average right now.
Tying this 25x multiple back to earnings discussed earlier and the share price, it appears the bullish share price is driving this multiple upward, however at the same time earnings have also grown.
Earnings grew 41% on a YoY basis, while the share price grew around 43% from March until today.
My sentiment is therefore in the middle on this, and I would consider it a hold rather than a buy at this multiple of 25x earnings.
P/B Valuation vs Average
I am looking for an undervaluation opportunity when it comes to price-to-book value , and here is what I found:
The forward P/B ratio of 3.56 is around 88% above the sector average.
Tying this valuation back to the share price as well as the equity shown in the balance sheet , we can see that the share price has been bullish lately but the equity/book value has also risen. For instance, most recently it was $7.8B vs $6.9B in Sept 2022, a 13% YoY improvement.
The share price this year went from around $320 in March to around $459 today, a 43% price increase.
So, I will say it is at least somewhat overvalued because the percentage gain in share price far exceeds the percent gain in equity value, to put it simply.
In this case, I think it is worthy of hold/neutral rather than a buy.
Key Risk
As an investor and analyst, I find it relevant to analyze risk as well, and this time I will go beyond just the metrics already mentioned.
One potential risk is a decline in construction of office buildings. The issue was raised in their Q3 financial supplement:
In recent articles I have already discussed the headwinds to office properties including increased remote work and rising defaults on office loans as the combination of high debt costs with falling office demand has dealt a blow.
Consider what Fortune magazine said in a Dec. 4th article a few days ago:
While the pandemic may be over, its effects on corporate real estate are long-lasting. Commercial real estate has been turned upside down and it is far from recovered. Just last month, the National Association of Realtors reported a high vacancy rate of 13.3% .
The article also highlighted issues with "conversion" of unused office space into residential, as an alternative option:
Two of the biggest hurdles are plumbing and HVAC.
.. would be extremely cumbersome and costly.
However, although light commercial/office is a potential headwind, one offsetting factor I think for this company would be its sector diversification, one of them being the construction of manufacturing facilities.
Consider the tailwind they are seeing in demand for supplying the construction of manufacturing facilities:
So, it seems one thing offsets the other, and I think this firm deserves at least a "hold" in this category rather than a sell.
Wrap-Up
To summarize, while at first glance looking at the share price vs moving average one could argue that this is a sell opportunity, which it could be, holistically it is leaning more towards a stock to hold onto.
Positives include revenue, earnings, and dividend growth, while headwinds include the share price and mediocre dividend yield.
My sentiment is more neutral when it comes to valuation and the risks stemming from declining office construction.
This is a sector I have never added to my portfolio or traded, but after further digging this particular company is being added to my watchlist due to some strong fundamentals, but also because virtually no building project could even be possible without companies like this that supply the materials.
For further details see:
Martin Marietta: A Building Materials Stock Worth Holding For Its Revenue Growth Potential