Shares of heavy-side building materials companies severely underperformed the market in 2018, with fears of an economic slowdown serving as the key overhang. However, decades of underspending has caused U.S. infrastructure to deteriorate, a concern that must inevitably be addressed. Indeed, infrastructure is the most important end market for aggregates, cement, and downstream building materials. While funding limitations have historically weighed on demand, the outlook should improve. First, midterm election results should ultimately boost funding at the national, state, and local levels. Until then, the FAST Act will continue to provide near-term funding support, as the Highway Trust Fund has enough funding to cover large outlays through 2021.
For the heavy-side building materials companies we cover-- Martin Marietta Materials (MLM), Summit Materials (SUM), U.S. Concrete (USCR), and Vulcan Materials (VMC)--current share prices are roughly 20%-50% below our fair value estimates. At these valuations, the market is underestimating future U.S. infrastructure spending made possible by an improved funding outlook.
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Kristoffer Inton does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.