Analysis: URI VMC NUE

After you receive this alert, we will make the following trades:

  • Sell 50 shares of United Rentals (URI) at or near $339. Following the trade, the portfolio will own 330 URI shares, roughly 3.0% of the portfolio.
  • Buy 210 shares of Vulcan Materials (VMC) at or near $178. Following the trade, the portfolio will own 210 VMC shares, roughly 1.0% of the portfolio.

United Rentals

A few weeks ago, during the August Members Only Call and in our follow up comments we shared that given the July share price strength for United Rentals we could look to book a slice of those profits even though the longer-term outlook for the companies business, thanks to spending tied to the Biden Infrastructure Law, remains bright.

Indeed, the favorable construction data contained in yesterday's July Industrial production report weighed in positively for that outlook. Since we made those comments two weeks ago, URI shares have climbed almost another 10% bringing the total move since we last bought the shares on June 28 to roughly 32%.

That is leading us to today where we are booking a slice of those hefty profits, leaving the portfolio ample exposure to URI shares to capture further upside as infrastructure spending ramps in the coming quarters.

Given that expected spending trajectory, we expect to see more favorable headlines like the ones we shared with members yesterday. We have exposure through United Rental's equipment leading business as well as through our shares of Nucor (NUE) , but when building roads, highways, foundations, airport runways, and other pieces on infrastructure, concrete and aggregates (gravel, crushed stone, and sand) that can be mixed with cement and asphalt should also see a pick-up in demand.

Vulcan Materials

With that in mind, we will use profits from today's sale of URI shares coupled with some of our cash on hand to begin a starter position in the shares of Vulcan Materials.

Like United Rentals, Vulcan primarily operates in the U.S. and it's the nation's largest supplier of construction aggregates. Also, like United Rentals, complimenting organic revenue growth Vulcan strategically uses its balance sheet to acquire companies that extend its reach. Since 2014, the company has acquired more than two-dozen companies. That combination has allowed the company to deliver steady top and bottom-line growth over the last decade, with only a modest decline when the pandemic hit in 2020.

By the numbers, roughly three quarters of Vulcan's revenue is derived from aggregates with the balance roughly split between asphalt and concrete. As the multi-year spending tied to the Biden Infrastructure Bill kicks in, Vulcan's top line is expected to rise more than 50% to $8.5 billion in 2024 vs. $5.55 billion in 2021 while the consensus view has its EPS soaring roughly 80% higher to ~ $9.15 in 2024 vs. $5.04 in 2021.

Tracing the company's share price back to 2013 through 2017, a period in which it saw its revenue grow 40% and its EPS outpace that, VMC shares peaked near $141 in early 2018, trading at ~35x expected 2018 EPS. That's also the average PE multiple VMC shares peaked at over the 2018-2022 period, ranging from a low of 32x to a high of just over 40x. By comparison VMC shares are currently trading at 32.7x expected 2022 EPS of $5.46 but as infrastructure tailwind picks up speed, translating into rising revenue, margins, and EPS for Vulcan, we could see the shares return to that average peak multiple as we move further past the initial stages.

Understandably, we have multiple quarters to go until we have a firm grasp on Vulcan's likely 2024 EPS and in the past, we've seen hiccups and timing issues crop up with programs similar to the Biden Infrastructure Law. As such, we're inclined to average out expected EPS over the 2022-2023 period if only to be conservative. That averaged EPS equates to $6.35 and applying the 35x multiple to it derives a price target of $222. As prospects improve and EPS expectations move higher, we'll have ample room to raise our price target, which means all things being equal we're inclined to hold VMC shares for the next several quarters.

On the downside, VMC shares bottomed out at an average P/E multiple of 23.5x over the last five years, including the pandemic trough of 18x. Again, taking the conservative route, against that blended 2022-2023 EPS figure, we see downside to roughly the $150 level. On a risk to reward basis that means we see net upside potential upside less potential downside of 8%.

Not enough for us to start VMC shares with a One rating but certainly a Two rating. In keeping with that rating and with the strategy that has served us well with a number of AAP holdings, we're inclined to build out this new VMC position at better prices, or as others may phrase it, on pullbacks.

The bottom line is we are starting a new position in the shares of Vulcan Materials, a company that fits squarely with our Rebuilding America theme, with a Two rating and a price target of $222.

One other item we should mention is Vulcan is a dividend payer, and its current quarterly payment is $0.40 per share. As it has grown its business, the company has sporadically increased its quarterly dividend and we would not be surprised to see it grow that payment as infrastructure spending ramps.

(Please note that we are looking to execute these trades at or near the share price mentioned above. Once the trade is completed, subscribers can see the trade's executed price here. Be sure to toggle the chart to sort by Purchase Date.)