2023-12-06 22:42:00 ET
Summary
- Martin Marietta Materials is a well-managed company in the construction materials industry with strong market power undergirding its margins and consistent profits but the stock is too expensive.
- MLM's share price has seen significant growth in 2023, but we consider the stock too expensive for retail value investors considering the valuation metrics and other headwinds.
- Our assessment is to consider the high share price as a Sell opportunity or a Hold if retail investors are okay with a negligible dividend yield and are risk-tolerant.
Pretty Picture
Martin Marietta Materials, Inc. ( MLM ) operates in a cornerstone industry of the economy. Martin Marietta supplies crushed stone, sand, gravel, ready-mixed cement, concrete, and asphalt for construction markets. The company appears well-managed by the same CEO for 17 years. It is a legacy American company founded in 1939. A leader in its industry, the company's market power drives product pricing and undergirds its admirable margins, net operating cash flow, and consistent profits. The company is pretty as a picture but shares are too expensive, in our opinion, at this time, for retail value investors.
In anticipation of a strong end to 2023, the share price climbed from ~$350 each at the beginning of the year to close around $460 the first week in December. That is, the share price is up nearly 36% YTD and 30% over the last 12 months. Martin is now not a worthwhile deal. We think this is a Sell opportunity for shareholders with profits, or at best worth a Hold rating.
Q3 '23 earnings report in November was highly positive :
We established all-time quarterly records across a number of areas, including consolidated total revenues of $2 billion, a 10.1% increase. Consolidated gross profit of $676 million, a 38.6% increase. Earnings per diluted share from continuing operations of $6.94 of 48.6% increase. Adjusted EBITDA of $705.2 million, a 32.3% increase and aggregates gross profit per ton of $7.89 of 42.4% increase.
Our skittishness stems from growing concerns among business leaders and the negligible dividend yield of 0.63%; the payout ratio amounts to 15%. Jamie Dimon talks about a recession. Warren Buffett holds a record $157.2B in cash finding "so few worthwhile deals." Others caution about headwinds facing the economy. There are pressures on the housing market , commercial, industrial , and infrastructure spending. Moreover, Seeking Alpha and others give the company high grades across the board except for valuation, which seems to push SA's Quant Rating more to the Sell-side of the bar.
Martin Marietta reported higher earnings every year since 2018 except for 2021 during the pandemic when earnings from continuing operations slipped to $702.3M from $721.1M in FY '20; they were $856.3M in 2022 and reported to be $1.1B TTM. Net operating cash flow growth is consistent with these figures. Cash from operations is reported at $1.4B compared to $991.2M almost Y/Y.
Wall Street and Seeking Alpha analysts highly rate the stock forecasting a climbing price for the stock. Martin Marietta owns a quarter of the market share as of Q3 '23. That gives it substantial market value through its market power to be competitive and maintain its margins.
Risks
Despite our respect and the homages, we believe the shares are too expensive for retail value investors at this time. The price is near the 52-week high of $472 each. At this high price, Martin Marietta's puts-to-calls suggest caution is warranted, according to Macroaxis .
Some analysts forecast the shares will top $550 each, up another +20%, by the end of 2024. Others warn its fair value is closer to $360 per share. Last month, Morningstar informed investors, "We've increased our fair value estimate to $325 per share from $323 due to the time value of money."
Consider these issues we raise when evaluating Martin Marietta Materials. Plus, there is the observation from Liz Ann Sonders, Chief Investment Strategist at Charles Schwab this week on Bloomberg. In her view, "stocks are in a rolling recession and notes only 5 stocks in the S&P 500 are leading the rally." We think all the good news is factored into the high price. We do not discount the stock's momentum but it can wither fast if forecasts are not met. We expect the shares to hover around $450 to $470 over the next three to 6 months after an impressive upping of 27.5% for the year and 38.2% YTD,
Insiders and hedge funds have been selling on the pump-up of the share price but not in any quantities to suggest there is a trend. 38 funds owned shares when the price was less than $390. 51 own shares in Martin Marietta in Q3 '23 buying in at an average ~$440 over the year. But momentum softened over the last 6 months as indicated by the SA Factor Grade.
The recent newsletter from The London Company Large Cap Strategy highlights the headwinds the company faces. It warns the company:
underperformed during Q3 after a strong start to the year. Quarterly results revealed lower than expected aggregate shipments, which have been negatively impacted by a softer residential market and adverse weather. Despite shipment declines and ongoing input cost headwinds, MLM's robust pricing strategy (our point about market power) has led to material gross profit increases this year. MLM maintains a leadership position within aggregates and its exposure to key markets continue to give us confidence that it will benefit from growth in construction and infrastructure spending for many years.
The valuation metrics swim in a crimson sea with four non-distinct exceptions. Martin Marietta is significantly more expensive compared to its peers on the first five P/E evaluations. Yet, these P/E metrics are lower than in December '22 when it hit 39.2x, and in June '23 when the P/E touched close to 30xs. The 1.23 Levered/Unlevered Beta suggests the stock price is volatile adding to the risks retail value investors may not want to tolerate.
Takeaway
There is little risk, in our opinion, that Martin Marietta's share price is going to dive into the $350 range in 2024. We expect that Q1 '24 EPS will be down 33% from Q4 '23 but if greater than that can depress the share price more dramatically. Martin Marietta's actual quarterly EPS significantly beat estimates in 7 of the last 9 quarters. We expect the Q4 '23 EPS will be higher, closer to $4 per share, than last year's Q4 of $3.04.
Dimon's bank "expects S&P 500 earnings growth of 2% to 3% in 2024 -- a rate that's well below the consensus analyst estimate of 11.4% growth next year, according to LSEG data." Martin Marietta is forecast to have earnings and revenue growth at a mean of around 8%; it sounds more conservative than 11.4% but will not shock the stock price if the company somewhat misses estimates.
Pricing power will continue playing a big role in maintaining healthy margins this year and probably next year. Couple that with moderating inflation, another unexpected pop in the US GDP that grew unexpectedly higher than anticipated, and extending the strength in construction starts in densely populated regions per Dodge Data Analytics reports, and Martin Marietta Materials can be worth the Hold rating to which it is clinging. Martin Marietta's next earnings report is expected in mid-February 2024. All this seems built into the expensive share price leaving us uneasy to consider Martin Marietta's shares worth more than a Hold assessment for retail value investors.
For further details see:
Martin Marietta Materials: Expensive Valuation, Negligible Dividend Yield