Zacks_Analysts' Blog : Vulcan Downgraded to Underperform - Analyst Blog

We have downgraded our recommendation on Vulcan Materials Company (VMC) to Underperform from Neutral.  Based in Birmingham, Alabama, Vulcan Materials is engaged in the production, distribution and sale of construction aggregates, and other construction materials and related services in the U.S. and Mexico. It is the nation’s largest producer of construction aggregates and a leading producer of other construction materials.

Vulcan Materials released its second quarter earnings on August 02, 2011. The company posted adjusted earnings of $9 million or 7 cents per share from continuing operations compared with $5 million or 3 cents per share in the year-ago quarter.

Net sales dropped 5.1% to $657.5 million from $692.8 million in the corresponding quarter of 2010. The year-over-year decline was primarily attributed to lower-than- expected demand, bad weather in April, partly offset by stronger demand for public infrastructure projects in some markets and price rise across all the segments.

Despite increased earnings in the most recent quarter, the company may see reduced earnings in the near future given the rising costs of certain essential materials along with the soaring prices of diesel fuel. The price rise for necessary resources is expected to continue, and raising the prices of products may not be enough to fully offset the inflationary effects in the near future.

Secondly, the growing competitive pressure is a major threat to Vulcan’s business. Although it is the nation’s largest supplier of construction materials, other companies are growing faster and capturing Vulcan’s market share, including CEMEX, S.A.B. de C.V. (CX), Lafarge S.A. (LFRGY), Cement Roadstone Holdings and Martin Marietta Materials Inc. (MLM).

Moreover, Vulcan generated only $7 million of cash from operating activities in the first six months of 2011 compared with $18.7 million in the year-ago period. This decrease was largely driven by an unfavorable variance in trade payables and accruals. Accordingly, the company’s working capital has been reduced to ($44.5) million at the end of the second quarter in 2011. This deterioration in the balance sheet may restrict the company’s future investment plans.