Vulcan Fails to Fly
Aug 24th 2011 10:49AM
Updated Aug 24th 2011 10:50AM
Infrastructure materials maker Vulcan Materials (NYS: VMC) reported yet another quarterly loss, hit by weak demand and climatic challenges.
Even though losses narrowed by almost two-thirds compared to those reported last year, is the company worth a place on your watchlist now? Let's see.
Vulcan's revenues for the second quarter dipped 4.6% from the year-ago quarter to $702 million, in spite of higher product prices. Shipments in the largest company segment, which is aggregates and is comprised of crushed stone, sand, and gravel, fell 9% as flooding and severe storms disrupted construction activity in many areas.
Severe weather conditions also hurt peer Cemex's (NYS: CX) second quarter volumes. Moreover, sales in the U.S. seem to be on the lower side too as Cemex's volumes and U.S. sales fell by 9%.
Volumes also fell in Vulcan's concrete and cement segments. Vulcan focused on reducing costs, which resulted in a 9% decline in selling, general and administrative expenses in the quarter. This is positive, as it helps offset other costs rising, such as diesel fuel, which surged 43% per gallon.
Vulcan's net losses narrowed to $8.1 million from $24 million in the year-ago quarter. But a point worth noting here is that last year's numbers included a charge of $41 million related to a lawsuit settlement, which diluted earnings by $0.21 per share. This time, a tender offer and debt retirement charge diluted Vulcan's earnings per share by $0.12.
Though Vulcan's cash equivalents have gone up from $42.2 million to $106.7 million year-on-year, its unlevered free cash flow went into negative territory this quarter, to -$3.1 million as compared to $53.8 million in the year-ago quarter. Moreover, long term debt has also risen significantly from $2 billion to $2.8 billion. With an operating income of $20.6 million, interest coverage ratio has just managed to crawl to 0.3 times in the quarter. Needless to say, such high debt in the books of a company which has been incurring losses is worth keeping an eye on.
The primary boost to Vulcan's business will need to come from an uptick in overall construction activity. But, a major rebound will still take time. Owing to a weak construction scenario, Texas Industries (NYS: TXI) incurred losses of $9.1 million in its latest quarter. Building material maker USG (NYS: USG) also reported second quarter losses of $70 million as housing demand remained subdued. Homebuilders are struggling with their numbers. A weak housing sector translates into lower business for Vulcan.
Another concern looming is the possibility of federal projects slowing down. With the U.S. government battling deficits, further cuts in spending are expected. And infrastructure as a sector could well become a victim of spending cuts.
What matters here is that public sector construction accounts for a major part (55% in 2010) of the aggregate shipments for Vulcan. Like Vulcan, peer Martin Marietta Materials' (NYS: MLM) shipments also dipped 11% in its second quarter. If infrastructure projects get deferred or canceled, business of construction-related companies is bound to be hit.
The Foolish bottom line
A loss-making company doesn't look very nice in one's portfolio. But if you are happy pocketing a 3.4% dividend yield (the company has consistently been paying a $0.25 quarterly dividend) while we still wait for the construction industry to rebound, this could be the stock for you.
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At the time this article was published Neha Chamaria does not own shares of any of the companies mentioned in this article. Motley Fool newsletter services have recommended buying shares of USG and Vulcan Materials. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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