Construction Suppliers Will Pave Road to Recovery

Wednesday, 13 Apr 2011 01:39 PM

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The construction sector took a bruising during the Great Recession, but there appears to be light at the end of the tunnel, even if the path to that light looks a little bumpy.

The Institute for Supply Management, a private trade group, says that its index of service-sector activity, which includes construction, dropped to 57.3 in March from 59.7 in February. It was the first decline in seven months, however any figure above 50 indicates expansion, the group says.

The fact is, construction is still reeling. Housing prices remain weak in many areas of the country, so new building isn't going to drive the recovery for now.

Long-term investment opportunities are out there, however. Take forestry company Weyerhaeuser (WY) and construction aggregates producer Vulcan Materials Company (VMC), two companies that supply the construction industry.

Recent news hasn't been good. In January, UBS downgraded Vulcan to neutral from buy, while Weyerhaeuser has been downgraded four times this year by McAdams Wright Ragen, RBC Capital Markets, UBS and DA Davidson, according to data compiled by Yahoo Finance.

But long fallow periods often lead to short-range bursts as pent-up demand kicks in. If the recovery remains on track, materials companies should see some green shoots soon.

Vulcan CEO Donald M. James says in the company's 2010 annual report that investors should buckle down for the short term. "When the residential and non-residential construction sectors begin to recover, we will do very well. Aggregates are an integral and early input to construction growth. Across the United States, existing infrastructure needs critical upgrades and repair. In our key markets, populations continue to grow, placing additional strain on existing infrastructure," says James.

The government plays a role in the development of infrastructure, and that role is up in the air thanks to the uncertainty of budgets, both federal and state. It’s unclear how long President Barack Obama's stimulus programs can keep infrastructure spending going.

"We expect that state spending on infrastructure should remain steady,"
says Ward Nye, president and CEO of Martin Marietta Materials, in the company's 2010 annual report.

"Uncertainty in long-term federal funding could negatively affect infrastructure spending. Taking a conservative posture, our outlook is based upon the expectation that the infrastructure end-use market will be flat to slightly down; we anticipate a modest 2011 volume recovery in the commercial component of our nonresidential end-use market."

Demand from other sectors, including energy, could be healthier.

"Cumulatively, we expect flat to a 3 percent improvement in overall aggregates volume in 2011," Nye said.

Weyerhauser’s P/E ratio has been beaten down to 5.62, clobbered largely on a massive special dividend it recently paid out. Despite the drubbing Vulcan has taken, JPMorgan and Zacks both have it rated as neutral.

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