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Concrete and aggregates are essential building materials, and thus are closely linked to the construction market. The current situation of rising rates and persistent inflation is negative for this industry, just as it is for many others. However, market dynamics seem to indicate strong growth prospects in the next few years, as well as in the long-term. Therefore, this industry could be a positive inclusion to one's portfolio at this time.

Increasing Homebuilding Demand

It is no secret that we are currently experiencing a housing shortage. Just this week, there was some disappointing data from the National Association of Realtors (NAR), which said that its pending home sales index dropped 2.7% in May.

Moreover, pending transactions were down 22.2% on the year. The NAR’s pending home sales index measures housing contract activity based on signed real estate contracts for existing single-family homes, condos, and co-ops. It is thus a leading indicator of housing market activity.

The main reason for the softness is a lack of available inventory, both new and existing. The high interest rates are keeping out existing inventory, although tax incentives may alleviate this situation.

While interest rates are also increasing costs for builders, these companies are incentivized by strong demand. As may be expected in any high demand scenario, home prices are increasing again. According to the latest S&P CoreLogic Case-Shiller US National Home Price Index numbers, home prices increased for the third straight month in April. Prices were up across all of the 20 cities tracked.

Government Infrastructure Spending Plan

The Biden administration’s $1.2 trillion infrastructure plan includes funding for roads and bridges ($110 billion), public transit ($39 billion, including modernization and repairs as well as provisions for the elderly and those with disabilities), broadband internet ($65 billion, including a $30 per month subsidy to 1 in 4 Americans for high speed access), the electric grid ($108 billion), EVs ($7.5 billion), clean drinking water ($55 billion to change all the piping), airports ($25 billion), etc.

Therefore, there’s a whole lot involved with construction activity, all of which will greatly increase demand for concrete and aggregates.

Repair & Remodel in Full Swing

The last 10 years have seen the sale of 5-6 million existing homes each year. A NAR report from last year discusses the average age of homes being approximately 39 years. Obviously, as homes age, they require more repair. Additionally, changing lifestyles require different setups, for which more significant alterations may be required.

Rising home prices and higher interest rates are also a deterrent to getting a new house. As a result, people may be more inclined to remodel what they already have. Another factor that plays a role is the kind of buyers.

Millennials are more focused on value because their cost of living and student debt among other things leave them with less cash to spare. To buy an existing home and remodel it according to their requirements could be an attractive proposition for this demographic.

According to JP Morgan’s 2023 Commercial Real Estate Outlook, “E-commerce will likely serve as a tailwind for the logistics industry—and industrial warehouse and distribution properties—for at least 10 years... The industry has begun to respond and deliver record amounts of new warehouses.”

The retail space is also likely to see some changes since malls and other locations that thrived from office-goer traffic are struggling to meet their financial commitments. Some cities are repurposing their Grade B and C malls to include restaurants, movie theaters, and experiential retail. Manufacturing infrastructure and data center growth are other drivers.

Additionally, global economic growth with its focus on infrastructure modernization/sustainability, energy transition, and national security, as well as growing urbanization across the world, are all secular drivers of this industry. These initiatives will require the construction of new buildings, transportation networks, and renewable energy projects, all of which rely on concrete and aggregates.

Near-Term Dynamics

In the near-term, there could be persistent challenges related to the supply chain, which would be negative for material costs as well as transportation and logistics. The higher interest rates are also increasing the cost of borrowings.

Additionally, in the current environment, many companies engaged in construction activity are having issues with the availability of raw materials and availability and skill of their labor force. This also slows down consumption of construction materials like concrete and aggregates.

Given the positive outlook overall, there are many companies to choose from. Below, I’ve picked and detailed four stocks in this industry.

Eagle Materials Inc. (EXP - Free Report)

This Dallas, TX-based company manufactures and sells heavy construction materials and light building materials in the US. Its four operating segments are Cement, Concrete and Aggregates, Gypsum Wallboard, and Recycled Paperboard.

Having topped March quarter estimates by 18.7%, Eagle Materials is seeing solid estimate revisions. The current year (ending March 2024) estimate has increased 7.9% in the last 60 days, representing 8.4% growth for the year. The estimate for the following year is up 7.8%, representing 9.4% growth.

Martin Marietta Materials, Inc. (MLM - Free Report)

Raleigh, NC-based Martin Marietta is a natural resource-based building materials company, supplying crushed stone, sand, and gravel products, as well as ready mixed concrete and asphalt; paving products and services; and Portland and specialty cement.

Martin Marietta beat estimates by 118.2% in the last quarter. In the last 60 days, there is an 8.4% increase in its 2023 estimate and a 7.5% increase in its 2024 estimate. At the current level, 2023 earnings are expected to grow 33.1% while 2024 earnings are expected to grow 13.9%.

Vulcan Materials Company (VMC - Free Report)

This Birmingham, AL-based company produces and supplies construction aggregates primarily in the US. It operates through four segments: Aggregates, Asphalt, Concrete, and Calcium.

The company’s 2023 estimate has increased 11.1%, while the 2024 estimate increased 9.7% in the last 60 days. Analysts are projecting 27.6% earnings growth this year and 18.4% growth in the next. This could be achievable given the 48.4% earnings beat in the last quarter.

Summit Materials, Inc. (SUM - Free Report)

Denver, CO-based Summit is a vertically integrated construction materials company offering aggregates, cement, ready-mix concrete, asphalt paving mixes, and concrete products, as well as plastics components through operating three segments: West, East, and Cement.

After the solid performance in the last quarter, wherein Summit Materials posted a positive surprise of 31.6%, analysts are incrementally optimistic about this stock. They’ve raised their 2023 estimate by 5.0% and their 2024 estimate by 6.6%. That means they expect earnings to grow 16.5% in 2023 and 19.8% in 2024.

EXP, MLM, and VMC are ranked #1 (Strong Buy) by Zacks, while SUM is rated #3 (Hold).

One-Month Price Performance

Image Source: Zacks Investment Research

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