Martin Marietta Materials – Rock Solid Prospects
A Quick Look at Martin Marietta and Aggregates
Martin Marietta Materials MLM 0.00%↑ is an aggregates and heavy-side building materials company that provides crushed stone, sand, gravel, ready mixed concrete (RMC), and Portland and specialty cement to customers throughout the United States. The company also has a small segment that produces magnesia-based chemicals. The aggregates component of the business (sand/stone/gravel) makes up two-thirds of sales but almost 80% of gross profit. End-market exposure for 2023 was 36% public infrastructure, 24% residential construction, 35% nonresidential, and 5% other.
The Foundation of Construction
Aggregates possess a few characteristics that make them a favorable long-term business to operate. From a use-case perspective, they are an essential component to any large-scale construction project. There are no viable alternatives to replace them and it is unlikely any will emerge due to the high weight, low value, and large quantities needed. On average, 38,000 tons of aggregates are necessary to construct one lane mile of interstate highway. Construction of the average home requires 400 tons of aggregate, while the average size school or hospital requires 15,000 tons (from AEM). Despite being an indispensable part of the build, they make up a small percentage of total project spending, accounting for roughly 10% on roads, 5% on commercial projects, and 2% on homes.
From an operations perspective, due to aggregates being heavy and cheap, transportation costs limit the effective sales range of a quarry. Materials tend to cost an average of $20 to $25 per ton while trucking costs can range from $0.20 to $0.70 per mile. This means that at distances of 50 miles or more, delivery starts to limit the economics of the sale. Martin Marietta targets markets where there are only one (themselves) or two viable options when it comes to choosing an aggregates provider for a project. This dynamic of localized monopolies and duopolies offers strong pricing power to operators.
In addition to limited transportation range, attaining permits for a new quarry is an extremely difficult and time-consuming process. Quarries are unpopular due to noise, increased truck traffic, and potential environmental risks. A company could spend years lobbying a local government to authorize a new quarry only for it to be denied. This makes existing quarries valuable assets, especially those in close proximity to areas of high economic activity and infrastructure demands.
Investment Thesis
Martin Marietta’s management team has been actively involved in reshaping the business in recent years. The company has been working to divest its more cyclical, commoditized, and less competitively advantaged assets in the cement and RMC space in favor of expanding their aggregates operations. Recent deals include divesting cement and concrete operations in California and Texas, as well as acquiring Colorado-based aggregates producer Albert Frei & Sons and 20 southeastern US facilities from Blue Water Industries. In 2023, aggregates accounted for 59% of sales while in 2024 they are expected to account for around 66%.
Out of all the company’s operations, aggregates are the most durable business with the highest barriers to entry. This ongoing shift to increase exposure will improve the overall quality of the company and its earnings. Additionally, this shift could contribute to modest multiple expansion in the stock. Top competitor Vulcan Materials generates almost 80% of sales from aggregates, which in turn leads to 89% of gross profits coming from that side of the business. Over the last 7 years the company has traded at a premium valuation, averaging a P/E of ~34x compared to Martin Marietta at ~28x. Both companies grew earnings at a comparable rate.
The management team is another strength of the company, and CEO Ward Nye frequently talks about how they think about the business with a long-term mindset:
“We think about our business in terms of decades, not years, not five years, but really decades. And as we look at it through that lens, we recognize that we have the product that is absolutely essential in every form of heavy side development. You don’t need asphalt in every piece of it. You don’t need concrete in every piece of it. But you need the aggregates in absolutely every piece of it.” (Q4 2023 Earnings Call)
As of today, the company believes they have reserves in excess of 70 years across their quarries. With such long-lived assets, it’s essential for management to identify long-term population and economic trends and to increase exposure to those markets. Decades of reserves won’t matter if there are no projects to consume them. Southern areas like Texas, the Gulf Coast, and Piedmont Atlantic are some of the fast growing “megaregions” and are expected to continue outpacing other parts of the country. Texas, Georgia, and North Carolina are three of the top five largest states by revenue for Martin Marietta, with Colorado (another megaregion) and Minnesota being the other two.
To protect their reserves and optimize profits, the company operates with a “value-over-volume” philosophy. Since reserves are always depleting, the value-over-volume strategy is built on the premise that those reserves are worth more tomorrow than they are today. The company is able to operate with this mindset due to the essential nature of aggregates combined with the limited delivery range and barriers preventing new quarries. From 2004 to 2021, the company’s price increases exceeded inflation in all but five years. During this period, the company’s price per ton rose more than 90% while inflation rose roughly 43% (from Morningstar).
Besides positioning themselves to serve faster growing markets, other tailwinds for the company include US infrastructure spending bills, rising energy demand, and reshoring trends of critical manufacturing. While public projects only account for 36% of sales, spending on infrastructure tends to be relatively stable, helping reduce some of the cyclicality of the business during economic slowdowns. Besides infrastructure spending, government bills such as the CHIPS act and Inflation Reduction Act are contributing to demand for new energy projects and new semiconductor, electric vehicle, and battery manufacturing facilities.
Risks
To touch briefly on risks, there are a few worth mentioning. First, they operate in a cyclical industry, particularly on the non-infrastructure side. Second, the company needs to consider and predict multi-decade economic and population trends when acquiring new quarry locations. Third, even though the state has strong forecasted growth, Texas alone accounts for ~35% of sales. And lastly, like all companies that engage in M&A, there is always execution risk when making deals.
Conclusion
In summary, Martin Marietta provides essential construction materials, is transforming itself to focus more on its higher quality and higher margin aggregates segment, is expanding its footprint in fast growing economic regions, and is being led by a long-term focused management team. As an investment, the stock trades at a lower valuation than peer Vulcan Materials, potentially making it a better value but also suggesting there may be room for multiple expansion. Over the long-term, the company is capable of generating low double-digit EPS growth through a combination of organic growth, acquisitions, higher aggregate profits contributing to margin expansion, and a few buybacks. There is some cyclicality to the business, but the general long-term trends are favorable. It might be a boring industry, but as long as there are roads, bridges, and buildings being constructed, aggregates will remain a mandatory input to construction projects.
Supporting Visuals
Additional Content
Want to learn more about the business implications of migration to the southern US? Check out this post from Andvari Associates and Fortune Financial along with the supporting 14-page white paper, "Going South: Implications of Business and Population Migration"
A great podcast episode that does a deep dive into Martin Marietta competitor Vulcan Materials can be found over on Business Breakdowns
Relevant Links & Sources
Martin Marietta Materials website
Disclosure
This post expresses opinions solely of the author. The author is not receiving compensation on behalf of and has no business relationship with any company whose stock is mentioned in the post. Data, forecasts, and predictions shared in this post are for informational purposes only and are not guaranteed to be accurate or correct. This post is not an endorsement to buy, hold or sell. Investing carries risk. Always do your own due diligence before making investment decisions or putting capital at risk in the market.