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Concrete and asphalt may lack glamour but building materials are proving a rock-solid investment. Vaccine rollouts and a pick-up in US economic recovery have made the notoriously cyclical sector attractive. President Joe Biden’s proposed $2tn infrastructure plan is the next catalyst for growth.
Shared hatred of potholes and traffic gridlock is one of the few things that a deeply divided US Congress can agree on. Biden has vowed to modernise 20,000 miles of roads, build bridges, ports and airports, and replace 100 per cent of the nation’s lead pipes. That bodes well for the likes of Vulcan Materials, Martin Marietta Materials and Mexico’s Cemex.
The S&P 500 Construction Materials Industry index has risen by almost a third so far in 2021 to a new high, outpacing the S&P 500’s 10 per cent gain. The question is whether major gains are over for now. For Vulcan, America’s biggest producer of construction aggregates, and rival Martin Marietta the answer is no.
Publicly funded construction already accounts for an average of 45 per cent of Vulcan’s aggregates shipments over the past five years, according to Fitch Ratings. At Martin Marietta, the figure is about 38 per cent. New infrastructure spending would provide both companies with more predictable cash flows to offset the boom and bust nature of private construction.
Cemex, the world’s largest cement maker, generates about 30 per cent of its sales and operating ebitda from the US. But its exposure to Latin America, which has suffered an outsize hit from the pandemic, is a drag on performance. Leverage is another concern. A net debt to ebitda ratio of 5.5 times is more than twice that for Vulcan and Martin Marietta.
Neither Vulcan nor Martin Marietta is cheap. Stocks trade on a multiple of 35 and 30 times this year’s earning estimates. But the figures look more reasonable if based on 2023 estimations.
This is a better gauge. Cash flow benefits are unlikely to accrue until late 2022 or 2023. Biden’s infrastructure spending will also be spread over eight years. Like the plan itself, these investments are long term.
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