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Shares of Martin Marietta Materials, Inc. (NYSE:MLM) have risen to fresh all-time highs after the company announced a nice bolt-on deal with Blue Water Industries LLC to expand its aggregates business, likely at relatively compelling multiples.
This transaction adds to a strong track record of Martin Marietta, which has been a very strong operator in recent years, enjoying strong pricing power. This, however, has been awarded even higher multiples with the passage of time, which creates a tough balancing act to make by investors.
On the one hand, Martin Marietta Materials is a great long-term value creator, yet on the other hand, the question can be asked if margins can expand further. This makes me cautious to get involved here, despite an impressive track record and relatively interesting deal.
The Business
Martin Marietta Materials is a diversified business which runs over 300 aggregates, quarries, mines and yards throughout the country. These facilities focus on aggregates, cement, asphalt and ready cement mix, as the business employs nearly 10,000 workers throughout the U.S.
These are quite lucrative activities, with the business generating $6.8 billion in sales (per the latest guidance for 2023), just over $2 billion in EBITDA and over a billion in net earnings from continuing operations.
The focus on aggregates, cement, and some magnesia specialties has served the company well, with the business in particular benefiting from greater domestic manufacturing, more focus on energy, as well as data centers. Great margins are supported by diminishing natural resources, limited substitute products, higher barriers to entry, and these products making up just a small fraction of the total cost of construction.
Looking at the third quarter results, we see aggregates making up the vast remainder of total shipments, at 56 million tons for the quarter, although average selling prices are seen at just around $20 per tonne. This is complemented by a near 4 million tons asphalt business, which posts average selling prices of around $65 per tonne. Cement and ready mix concrete combined make up nearly 3 million tons, with average selling prices seen in excess of $160 per tonne.
Valuation Discussions
On the first day of November, Martin posted third quarter results, with revenues so far that year coming in 10% ahead of the same period in 2022, with revenues seen at $6.8 billion per annum. As mentioned before, the company is incredibly profitable with EBITDA seen at a midpoint of $2.1 billion, and earnings seen at a midpoint of $1.15 billion.
The company has been awarded premium valuations on the back of the thesis, which is all about increasing demand and limited supply. On top of a $3.7 billion net debt load (as of the third quarter), the company has 62 million shares outstanding, which trade near their highs at $537 per share, granting equity a valuation of $33.3 billion, and thereby valuing the entire firm at $37 billion.
This values the business at around 5.5 times sales and a premium 17-18 times EBITDA multiple. Based on earnings power around $18 per share, the company trades at a premium 30 times multiple, while carrying some debt as well. Important in this consideration is that all these gains are driven by pricing (and some more) with full year volumes for 2023 seen down between 4 and 5%, more than offset by a huge price increases.
While the company has not yet reported full 2023 results, the company already guided for relatively flat shipments in 2024, driven by demand in public infrastructure and heavy non-residential sectors, offset by weakness in more inters rate sensitive markets, with low double-digit increases in prices expected.
Increased demand is driven by a range of investment programs, including the Federal Highway Investments, CHIPS act and Green Energy Tax credits, complemented by various state and local programs, as the guidance essentially implies 10% revenue growth for 2024, or more.
Moving Parts
In November, Martin Marietta announced the sale of its South Texas cement business to CRH Plc in a $2.1 billion deal. Few financial details, other than the purchase price, have been announced. This was in part offset by a smaller acquisition, as the company announced the acquisition of Albert Frei & Sons, an aggregate producer in Colorado.
The bigger news was a $2.05 billion acquisition of 20 aggregates operations from Blue Water Industries, as announced by mid-February, which actually followed completion of the deal which the company made with CRH. This deal, and the purchase of Albert Frei & Sons, adds over a billion tons of proven and high-quality reserves, adding about $180 million in EBITDA.
This looks compelling given the purchase price, but we have to remember that the $180 million is based on the two acquisitions, as no purchase price of the Albert Frei deal has been communicated, making it hard to see the real impact, although the combined multiple likely comes in below the multiple of the firm itself here.
And Now?
The reality is that Martin Marietta has been a decent long-term value creator, having grown revenues from about $2 billion a decade ago to nearly $7 billion, as guided for in 2023. This is driven by (M&A) growth, as pricing has been a major driver behind a massive increase in margins as well, which have risen from low double-digits to about 25% of sales, all while the share count has been relatively stable.
While the latest moving parts are relatively small in terms of their respective contributions, the thesis remains dominated by strong pricing, with pricing more than offsetting volume declines. On the other hand, this shows a poor mix of growth, but if pricing remains a continued factor, with peers unable to effectively compete again the business and enter the markets, it could be a real positive.
Being a resource company typically prohibits steep valuations, although that the company recently confirmed its reserve position, indicating that it has reserves equal to 70 years’ worth of production here, as recently confirmed on the conference call.
Amidst all of this, I think that the Martin Marietta Materials, Inc. business is a sound long-term business, but I feel that valuations are rather demanding here, not creating a great risk-reward at around 30 times earnings, which are based on peak margins (at least if history is any indication here) as a current $537 stock traded at just $300 in the spring of last year.
Amidst all of this, now is not the time to get involved with the shares here, as an improved risk-reward simply has to come from a stagnant or even falling share price. While I am happy to award a small premium based on great execution, a 30 times multiple simply feels too demanding here, even as the latest deals seems to take place at much more reasonable multiple (compared to its own valuations). Shares certainly deserve a spot on the watch list, but at the current levels near their highs, I have no business in getting involved with the shares here.
