On Thursday, UBS initiated coverage on Vulcan Materials Company (NYSE:VMC) stock, a major producer of construction aggregates, with a Buy rating and a price target of $349.00. The firm's outlook is based on the expectation that Vulcan Materials will benefit from an improving non-residential construction market in the second half of 2025 through 2026.
The UBS analyst highlighted that the anticipated earnings growth for Vulcan Materials is currently underappreciated by the market. With an expected 3-4% growth in aggregates volume in 2026, surpassing the consensus of a 2.5% increase, and an enhanced pricing power, Vulcan Materials is poised for significant growth.
These factors, combined with Vulcan's operational initiatives aimed at boosting pricing and managing costs, are projected to result in a compound annual growth rate (CAGR) of approximately 9% for aggregates cash gross profit per ton from 2024 to 2026.
The analyst also noted the strong cash flow Vulcan Materials is expected to generate over the next 12 months, which should support its strategy of engaging in accretive mergers and acquisitions, offering additional upside to earnings.
Based on the current stock price and applying an enterprise value to earnings before interest, taxes, depreciation, and amortization (EV/EBITDA) multiple of roughly 18.3 times, which is slightly above the normal trading range, the stock is suggesting an EBITDA of about $2.3 billion. This is conservative compared to UBS's estimate of approximately $2.7 billion.
UBS anticipates that in 12 months, the market will apply the EV/EBITDA multiple to their higher EBITDA estimate, implying a potential 20% upside to the stock price. Moreover, the firm foresees a possibility for modest multiple expansion as Vulcan Materials continues to grow and strengthen its aggregates portfolio, thereby expanding its competitive advantage over time.
In other recent news, Vulcan Materials has been the subject of several recent analyst reviews. Loop Capital raised its price target for the company to $310, maintaining a Buy rating based on the company's resilience in a challenging environment and potential for further growth, including the pending acquisition of Wake Stone. Similarly, an analyst from Stephens increased the stock price target to $325, also maintaining an Overweight rating on the stock, following Vulcan Materials' third-quarter performance.
Despite a 10% decrease in aggregate shipments due to severe weather and the divestiture of its Texas concrete business, Vulcan Materials reported a slight decrease in its adjusted EBITDA to $581 million in the third quarter of 2024.
However, the company experienced its eighth consecutive quarter of year-over-year cash gross profit per ton increase. The acquisition of Wake Stone Corporation is expected to add 8-9 million tons of capacity in Eastern North Carolina and contribute to the company's future growth.
In other developments, Vulcan Materials is expected to play a significant role in rebuilding efforts in areas affected by recent storms, likely increasing demand for the company's materials and services. The company's preliminary guidance for 2025 anticipates high single-digit aggregates ASP growth, low single-digit organic volume improvement, and double-digit aggregates unit profitability growth. These recent developments suggest the company's strategic moves towards future growth.
InvestingPro Insights
Recent data from InvestingPro adds weight to UBS's bullish outlook on Vulcan Materials Company (NYSE:VMC). The company's market capitalization stands at $38.36 billion, reflecting its significant presence in the construction materials sector. VMC's strong financial performance is evident in its EBITDA growth of 5.52% over the last twelve months, aligning with UBS's expectations of continued growth.
InvestingPro Tips highlight VMC's consistent dividend performance, having maintained dividend payments for 54 consecutive years and raised its dividend for 11 consecutive years. This demonstrates the company's financial stability and commitment to shareholder returns, which could be attractive to long-term investors.
However, it's worth noting that VMC is trading at a high P/E ratio of 45.48, which may indicate that the stock is currently priced at a premium. This aligns with UBS's observation that the market may be underappreciating VMC's future earnings potential.
For investors seeking a more comprehensive analysis, InvestingPro offers 15 additional tips on Vulcan Materials Company, providing a deeper understanding of the company's financial health and market position.
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