Tuesday, May 4, 2010

Martin Marietta, still awaiting that elusive "Stimulus" (MLM)


Earlier this morning, construction materials company Martin Marietta (MLM) reported a q1 loss of 54cents per share, about 20 cents worse than was expected. Higher depreciation expenses and a 56% increase in the cost of diesel hurt, while they did manage to cut costs in more discretionary areas. Shares are down 5.5%, and the conference call is later this morning.

From the release:

"Our operating team continued its focus on cost containment, and, consequently, our consolidated cost of sales decreased $5.3 million, or 2%, for the quarter. With the exception of depreciation, which increased $2.8 million, or 7%, and energy costs, which increased $4.2 million, or 15%, we again reduced our cost of sales in every significant category. The increase in energy costs was driven in large part by diesel expense. For the first quarter, we paid $2.03 per gallon for diesel, a 59% increase as compared with the prior-year quarter."
The 2010 guidance is murky at best, but aims for a slight increase in sales and profits over 2009:
“Based on our current economic view, we expect aggregates volume growth of 2% to 4% and aggregates pricing to range from flat to an increase of 2% compared with prior year, which should lead to increased aggregates sales and improved gross margin and profitability in 2010."
This firm is enormously dependent on state highway and infrastructure spending, and is a good measure of the effectiveness of the American Recovery & Reinvestment Act. Forget what the administration says - the ground-level data from companies like MLM show that it is a wreck:
While over 80% of ARRA infrastructure money in our top five states was obligated in 2009, less than 15% was actually spent.
MLM's fixed costs enable nice upside earnings leverage in good times, but it can be very ugly in a soft sales environment:

So what are the shares worth? I don't know, but you can have them. Thanks to rapid expansion, MLM hasn't produced much more than $100million in Free Cash Flow even in flush times. Even an assumption that earnings return to the $6 per share level would leave shares with a PE of 15... right now. The company's dividend yield is 1.6%...are you kidding? You can get almost 2% more than that from DJIA members Procter & Gamble and Johnson & Johnson, just to name a few.
This company's previous peak results were based on "bubble-level" infrastructure spending, and I don't think the market is pricing in this risk well enough. I just heard that the shares were downgraded to SELL this morning by a bank, and I'd have to agree...stay away.
Copyright 2010 AlphaNinja

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