The aggregates industry is based on the extraction of materials such as gravel, sand and crushed stone. These natural resources serve as the basis for concrete and asphalt, and are indispensable for the construction of everything we do, from roads and bridges to residential and commercial buildings.

Demand depends on the economic cycle. Production peaked in 2006 before plummeting during the 2008 financial crisis. After a dip in 2009, production has picked up again, albeit subject to fluctuations. In 2023, rising interest rates led to a slowdown in residential and commercial construction.

Although volumes have slowed, aggregate prices have risen over the past three years. The company's gross profit per tonne almost doubled from $5.9 to $10.4.

Average selling price and gross profit per tonne for Martin Marietta

It's also crucial to understand the specific dynamics influencing this market. Transporting building materials over long distances is costly, which is why building materials quarries are located close to urban centers. This proximity reduces transport costs and encourages the formation of quasi-monopolies or duopolies in many states. This situation gives players pricing power, as well as high barriers to entry. Not only because of the initial costs involved in acquiring land and heavy equipment, but also because of the strict environmental regulations that make it difficult to obtain the necessary permits for mining.

Make way for Martin!

Martin Marietta Materials specializes in building materials based on natural resources. The company operates a vast network of some 360 quarries, mines and distribution depots in 28 US states, as well as in Canada and the Bahamas. In addition to aggregates such as crushed stone, sand and gravel, the company also produces cement and offers downstream products such as concrete, asphalt and paving services.

By 2024, the company expects aggregates to account for 66% of sales. Cement and other products will account for around 29% of revenues. The last segment, which specializes in magnesium oxide, is more anecdotal, but should account for 5% of estimated sales.

Martin Marietta derives most of its revenues from the United States, with a concentration in Texas that should generate around 28% of sales.

It categorizes its customers into three main segments: infrastructure, non-residential and residential.

In 2023, public infrastructure projects accounted for 36% of aggregate shipments, a market that is generally stable thanks to government funding. Martin Marietta believes that the Infrastructure Investment and Jobs Act (IIJ Act) should further stimulate the sector, with new financing approved in November 2023, particularly in Texas.

The non-residential and residential segments, representing 35% and 24% of aggregate shipments respectively, have demonstrated their resilience over the past two years of high inflation. According to the CEO, with interest rates stabilizing and housing affordability improving, a recovery in construction is anticipated.

Martin Marietta is also a supplier of railroad ballast and agricultural lime, niche products that account for 5% of its shipments.

With few substitutable products and barriers to entry for new competitors, Martin Marietta is capitalizing on these competitive advantages to strengthen its leadership position. The company concentrates its efforts in regions where it is already well established, enabling it to optimize efficiency and profitability.

Finance

Martin Marietta Materials, with a market capitalization of $37.5 billion, is the third largest player in its sector. The Enterprise Value/Ebitda ratio for 2024 is estimated at 17x - slightly above the company's historical average.

Over the past decade, sales have almost quadrupled to reach $6.8 billion in 2023, representing an average annual growth rate (CAGR) of 11.7%. At the same time, net margin has risen to become the highest in its sector, reaching 17.3% in 2023. This improvement is explained by the strategic choice to focus on aggregates, its most profitable segment, and by the positive impact of acquisitions.

This financial performance enabled the company to pay out $1.3 billion in dividends and buy back an equivalent amount in shares, giving a payout ratio of 29.5%.

Long-term debt amounts to $4.3 billion, with maturities up to 2051. With $1.3 billion in available cash and a Free Cash Flow to Firm of $1 billion in 2023. The company would need four years to fully repay its long-term debt, which is in line with industry standards.

Over the past decade, Martin Marietta has invested more than $8 billion in acquisitions. Earlier this year, the company concluded with Blue Water Industries the purchase of 20 aggregate producers for $2.1 billion. These acquisitions enabled the company to optimize its portfolio. Similarly, the company decided to divest part of its Cement segment for $3.1 billion.

Outlook

At the last quarterly results presentation, the company raised its sales forecast for 2024 to $7.1 billion. This upward revision is supported by a 10% increase in aggregate prices and the expected benefits of the Blue Water acquisition. The company refers to its intention to continue divesting its non-strategic segments.

Martin Marietta shares are currently trading at all-time highs. A drop in share price over the coming months is conceivable. This could represent a buying opportunity for investors, given the company's strong margins, which generate value for its shareholders, and its clearly defined action plan for the coming years.

By way of comparison, here's a table showing the main MLM competitors listed on the stock market:

Sector stock market performance since 2010