3 Reasons to Avoid VMC and 1 Stock to Buy Instead

Vulcan Materials currently trades at $275.51 per share and has shown little upside over the past six months, posting a small loss of 0.9%.

Is there a buying opportunity in Vulcan Materials, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Is Vulcan Materials Not Exciting?

We're cautious about Vulcan Materials. Here are three reasons why we avoid VMC and a stock we'd rather own.

1. Revenue Growth Flatlining

Long-term growth is the most important, but within industrials, a stretched historical view may miss new industry trends or demand cycles. Vulcan Materials’s recent performance shows its demand has slowed as its revenue was flat over the last two years.

2. Decline in Tons Shipped Points to Weak Demand

Revenue growth can be broken down into changes in price and volume (for companies like Vulcan Materials, our preferred volume metric is tons shipped). While both are important, the latter is the most critical to analyze because prices have a ceiling.

Vulcan Materials’s tons shipped came in at 47.8 million in the latest quarter, and over the last two years, averaged 3.2% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests Vulcan Materials might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability.

3. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, Vulcan Materials’s margin dropped by 5.6 percentage points over the last five years. It may have ticked higher more recently, but shareholders are likely hoping for its margin to at least revert to its historical level. If the longer-term trend returns, it could signal increasing investment needs and capital intensity. Vulcan Materials’s free cash flow margin for the trailing 12 months was 11.6%.

Final Judgment

Vulcan Materials isn’t a terrible business, but it isn’t one of our picks. That said, the stock currently trades at 32.9× forward P/E (or $275.51 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better investment opportunities out there. We’d suggest looking at a safe-and-steady industrials business benefiting from an upgrade cycle.

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