Monday, December 8, 2008


The Obama stimulus rally has had serious legs the past several days, moving both infrastructure plays and the market, in general, up nicely. Investors have bid up all companies associated with Obama's sketchy stimulus outline. Among the biggest movers have been the aggregate companies as they are among the first to supply product in road construction projects. The concept makes sense except for the fact that they were on of the few sectors that wasn't cheap. I had planned on adding shares when Martin Marietta Materials sank to a reasonable multiple of Enterprise Value to EBITDA. But its slide abruptly stopped with all of the stimulus hoopla. It moved quickly up from $60 to $105. Vulcan and the other similar companies also rose dramatically. I can't bring myself to by MLM at the current price. I also won't bet against it like I did successfully last year as there are better targets.

Vulcan Industries, VMC, is the industry leader and has several negatives that can nullify any boost from highway spending. They are weighed down with lots of debt from last years huge purchase of Florida Rock, have been using their revolver, and have about $300M of debt coming due in 2009. Additionally, they have been paying a dividend of $1.96 and are expected to earn only $1.90 for the year ending December 2008! Analysts have projected earnings of only $1.98 for 12/09. If they keep the dividend the same they will be paying out 100% of earnings. You can't do that for very long. You have even less time if your bankers don't think it is a good idea. Vulcan will cut their dividend and they should.

Vulcan is a three legged stool with two legs broken and one promised to be fixed. Residential construction is obviously still in the doldrums and commercial projects have halted. The commercial activity that is ongoing was funded several years ago and those projects are past the rock and concrete stage. Vulcan is in for a 4th quarter that is not pretty. They will probably make money, but it is likely to be the 5th quarter in a row that they missed analysts expectations. The 1st and 2nd quarters of 2009 will also be skimpy as it will take awhile for any stimulus projects to kick in. During that time the dividend will be cut and debt ratings could be reduced.

I'm not going to short VMC tomorrow as there is probably still some piling in that will occur before year end as mutual funds want to show infrastructure plays in their portfolio. But, after the New Year I think I'll pull the trigger. I haven't talked about Eagle Materials, but I may diversify my short by adding Eagle. They are in aggregates and concrete like Vulcan, but also have larger parts of their business in cement and wallboard. They will get less help form a highway stimulus and their stock price has risen like they would.

The most reasonable infrastructure play is Trinity Industries, TRN. They are big in wind towers and highway crash cushions, both beneficiaries of a likely Obama stimulus. And TRN can be bought for good value metrics.

If Obamahood is going to take from the rich I want him to give to Trinity. Here's to Change!

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