FINANCIAL ANALYSIS REPORTRecommend: BUYWe are issuing a BUY rating on MLM stock because we believe thatthe market is undervaluing the stock. Our different methods ofvaluation gave us a target price range of 100-107. We expect theMLM stock will be boosted in the short term when the economy ofthe US rebound.In addition, the companys strengths can be seen inmultiple areas, such as its robust revenue growth, increase in netincome, largely solid financial position with reasonable debt levelsby most measures, solid stock price performance and growth inearnings per shareHIGHLIGHTS:Martin Marietta is an enterprise with a cyclical tempo and becauseof it, several elements let us think that we are in decrease, whichprojects a strong regain for the upcoming five years……It is also, an enterprise based on a strong and intensivelyconcurred sector demanding strong capital investment, therefore ahigh negotiation power from providers and costumers……It is also an enterprise well based in the United States, developingan external growth strategy, having as a goal to develop strategicimplantations, in order to strongly reduce transportation costs, whichare so important to the value chain.12/12/2011Martin Marietta’s announcement ofproposal with VULCAN ownership, thechange into 2 VULCAN shares vs 1 MLMshare.05/07/2012Chancellery court of DELAWARE rejects MartinMarietta’s proposal because it revealedconfidential information about this subject06/11/2012Announcement of theearning of Q3 2012Price close: 95.32 Target 12 mouth: 107 Stock type: cyclicalEPS basic : 1.79 EPS diluted : 1.78 Cash dividend/share : 1.60Net sales : 1.5 billion Net earnings :82.4 currency :$USDResponsible for analysis:Loic.firstname.lastname@example.orgTeam member:email@example.com@skema.eduPlease read the disclaimer at the endof this report for important informationDividends
ENTERPRISE PRESENTATION & HISTORYMartin Marietta Materials (NYSE: MLM) is inthe aggregate, chemical, and composite material business. It is thesecond largest producer of crushed stone, sand, and gravel inthe United States behind Vulcan Materials Company.It is a leading U.S. producer of magnesia-based chemicalproducts used as additives inapplications including ceramics, paper,sugar, animal feed, and water treatment. It produces dolomiticlime used as a fluxing agent by the steel industry. It is a supplierof fiber-reinforced polymer products for use in infrastructure such aspanels, bridge decks and transportation components such as trucktrailers andrailroad cars.It was established as an independent company in 1996, spun off fromthe newly created Lockheed Martin after having been part of MartinMarietta since 1961. Itdates its origins back to 1939, when SuperiorStone, an aggregates company inRaleigh, North Carolina, wasfounded. The companys corporate headquarters is located inRaleigh.1961: Martin Marietta formed by merger of the Glenn L. MartinCompany and American-Marietta Corporation1994: Martin Marietta Corporation completed its initial publicoffering of 19% of the common stock of Martin Marietta Materials,which is listed on the New York Stock Exchange as MLM.1995: Martin Marietta merged with Lockheed Corporation toform Lockheed Martin1996: Lockheed Martin splits off Martin Marietta Materials as aseparate and independent entityGOURVERNANCEC. Howard NyePresident and Chief Executive Officer, Martin Marietta Materials Holdings: 63,988 sharesC. Howard (Ward) Nye is President and Chief Executive Officer forMartin Marietta Materials. Effective January 1, 2010, Mr. Nye wasalso elected to the Board of Directors. Mr. Nye served as theCompanys Chief Operating Officer from 2006 to 2009. Immediatelyprior to joining Martin Marietta Materials in 2006, he was employedby Hanson Aggregates North America for nearly 13 years holdingvarious positions of increasing responsibility, most recentlyExecutive Vice President.80%4%2% 2% 9%3%% Net sales per product 2011Aggregates Asphalt Ready Mixed ConcreteRoad Paving Magnesia-Based Chemicals Dolomitic Lime01002003004005006007008002012 2011711,2483,4151,6 149,1213,1 217,4305 295,3Sales by sector nine mouth endedMidestSoutheastWestSpécialty
COMPETITORSCompetivity on this sector is really intense, noting that all enterprisesof this sector have suffered the impact of economic crisis in 2007,and thereafter its consequences.In fact, after Lehmann brother’s bankruptcy ,and undercapitalizationthat they faced, a secondary effect being the justification of rawmaterials , such as fuel has had important impact on theseenterprises margins.Nevertheless the impact of politic choices in the United States haslead us to come back to the analysis of 2009, with shares pricestabilization at the same time that a progressive growth.Accordingly, new trends are being developed in aggregates supply,this is also a relevant factor of explanation for upcoming growth.As we can observe, the spending on infrastructure and roads are toptrends , while the spending on household buildings and for otherpurposes are having a decrease.By using PORTER’s forces, we infer the competition character ofthis sector .- Power of new entrants is very limited, in fact we can justify itby two major elements: scarcity of job careers on aggregatesavailable, and the necessary capital to get inside.- As previously quoted, the suppliers force is relevant, we willprecisely remark the augmentation of fuel price and itsimportance in value chain, energies represent 14% of valueestimate by the direct costs method.- Despite of this scarcity in terms of aggregates in the south ofUnited States, we also highlight that costumer negotiationpower stays preeminent . Indeed, directly linked to the intensecompetition, at the same time that there is no distinction onproducts quality, the only reasonable selling justification isprice.We can conclude that competitive advantage to develop is theresearch of costs domination.050000010000001500000200000025000003000000350000040000002007 2008 2009 2010 2011COGSSales
CORPORATE STRATEGYMLM has his headquarters based in the United States, it deliversaggregates in 31 states, Canada, Bahamas and Caribbean with 287facilities. MLM estimates its 12,5 million tons of reserves areenough for 50 years of production, even when these reserves arevariable from a place to another.MLM strategy consists in developing a competitive advantagearound cost domination.To do this, it has invested on performing information systems ,which allow every year reducing expenses (SGA-6ppm for 2011)At the same time, its policy is development through strategicimplantation, in a general way in the United States, but also morespecifically in the southwest, especially from Texas to the westcoast.It takes in consideration several elements, first of all, the migrationfluxes highly oriented to this region, subsequently, 74% ofaggregates consumption is done over there, et finally, this regionpresents scarcity on available aggregates quantities, that eventuallywill lead to price increase.MM considers that the best way to spend less is by logistictransportation of its products mostly by boat, all along the coastsand the rivers. Indeed, ground transportation, costs around 15-45cents usd/ ton per miles, 6-11 cents by train and only 4 to 1.2 centsby boat.Not only is there the Mississippi river on the south but also 2 otherrivers, where the three of them get together in a joint called thethree rivers, it is then a very strategic place for MM, since a verylong time the enterprise is organized and located undercircumstances that allow it to develop a strategic advantage ofcosts domination .migration
STRONG & WEAKNESSESDiversifying means of Transport in order to reduce Costs.As an outcome of consolidation and purchases over the last years, Martin Mariettahas gained access to various means of transport for its aggregates. As MartinMarietta keeps transporting more aggregates by rail and water, embedded freightcosts reduce also overweight margins by less than if these shipments weretransported by truck. Most of the rail and water transportation happens in theSoutheast branch and the West branch. Though, the enlargement of MLMs raildistribution network increases its dependence on railroad performance, such as trackcongestion, crew availability, and the ability to negotiate favorable railroad shippingcontracts. Likewise, the aquatic distribution network increases MLM’s exposure torisks such as negotiating favorable shipping contracts, fuel costs, charge or shipavailability, and weather troublesConstruction Weakens, Aggregate Demand Drops.Most of MLMs aggregate products are for construction industry, so its resultsdepend somewhat on the power of the construction industry. The housing fall since2007 has affected in a negative way MLMs business as new home construction fell,reducing the number of residential homes to be built (and of course supplied withaggregates). Whereas private residential construction is a small market for MLM, thesevere decreasing in activity impacts business.Government Subsidy Lacks delay ConstructionThe stability of government-funded infrastructure projects provides isolation to ageneral economic recession, but the level and timing of federal and state funding areimportant in order to keep this stability. A lack of funds can delay currentconstruction and put new projects on hold. For example, the North CarolinaDepartment of Transportation has a lot of construction projects on hold due to a lackof federal funding. Indeed, publicly-funded construction around the country isdecreasing due to budget deficits. Such deficits, especially in MLMs in the five mostimportant revenue-generating states such as North and South Carolina, will put aobstruction on demand for aggregates.Operation and Transport logistic are more costly due to energetics prices.Martin Marietta needs continuing supply of diesel, fuel, natural gas, coal, petroleumcoke and other forms of energy for production. Growing energy costs, affectnegatively on the production of MLMs aggregates, but also make their transportmore expensive, as mentioned above.Weather Circumstances Can affect Aggregates OperationsThe aggregates industry is by nature seasonal; as construction takes place outdoors;most business is done during the better weather of the second and third quarters ofthe year, while the first and fourth quarters see lesser activity. Nonetheless, hostileweather conditions can at any time reduce demand for MLMs products, at the sametime that increases costs and reduces production.Business in the southeastern U.S.and the Bahamas is particularly vulnerable to interruption by hurricanes and tropicalstorms or heavy rainfall, for example, dry weather causes low water levels andresults in reduced tonnage able to be shipped on a charge, while heavy rainfall andflooding in Texas, Oklahoma, and Kansas can affect shipments and logisticoperations.
MARKETThe United States of America is the third most populous in theword, and its economy is the largest in the word with GDP closed to $1504bn in 2011, despite it has faced an economic downturn since2008. In 2007, GDP expanded by nearly 2% year-on-year, but in 2008growth was flat and in 2009 the country saw a 3.5% contraction in itseconomy. In 2010, this contraction was reversed, with 3% growth. In2011, the economy grew slightly more slowly, with 1.6% growth.However, the first quarter of 2012 saw an improvement of 2.1%comparing to 2011. The level was down on analyst’s predictions, butthe US Federal Reserve increases its 2012 growth forecast from 2.2 –2.7% to 2.4 – 2.9% in late April 2012.The US cement industry is one of the largest in the world, with anestimated installed capacity over 100Mt/yr. The 2012 edition of theGlobal Cement Directory puts the country third in terms of active andmothballed capacity (>113Mt/yr), behind China (>1400Mt/yr) andIndia (>230Mt/yr). The current economic downturn affected the UScement industry. From 2005 to 2010, the two states seeing a netincrease were Louisiana and Nord Dakota (+17% although at a lowlevel).Forecast: The construction materials is currently engaged capacityexpansion. By 2012 more than 25 million metric tons of new capacityis expected to come on line, representing more than $6 billion ininvestment. Cconstruction in the United States, as estimated by thePortland Cement Association (PCA), increased by 3% to 77.5 millionshort tons in 2011. Building materials Consumption depends on theseasons related to weather conditions. Demand for products isgenerally cyclical and seasonal, depending on economic andgeographic conditions. PCA reported that it expects consumption toincrease by 3.7% in 2012 over the 2011 level. This will result to amarginal improvement in non-residential constructions, an anticipated15% improvement in new housing starts and an increase in thecement-intensity of projects. Beyond 2012 the PCA estimatesaccelerated expansion: 7.6% in 2013 and 14.1% in 2014. By 2016, itexpects cement consumption will increase by 35Mt/year.Opportunities- The recovery of the housing market USA. It mightbe slow to start, but once it gets going it keeps ongoing for a while- Government spending increased makes the demandfor the construction industry also increase.Threats- Adverse weather conditions.- Availability of raw materials.- Changes in energy costs including, without limitation, natural gas and oil.- Changes in the cost and availability of transportation.- Competition; announced increases in capacity in the gypsum wallboardand cement industries.- Changes in the demand for residential housing construction orcommercial construction
FINANCIAL STRUCTUREThe financial structure of MLM is clean, as we can observethe graph showing the extent of Beneish, all accounts couldnot be used manipulated.First of all, we’d get interested on the working capital requirements,and the working capital of this enterprise. These two measureshighlight the cyclical character of investment done by MM.The working capital, has been almost multiplied by two in 2008,meanwhile the working capital requirement kept the same.it’s related then, to a process consisting on the enterprise to stretchout its short term debts, in order to reduce de liquidity requirements.We can confirm the different levers that have allowed these actions, inparticular, the debt lever to equity that has a lever going from 0.56 en2006 to 1.19 in 2007.These different operations show that the enterprise has known how tomake the good decisions in the right time. We can place on thisthe current treasury ratio, and also the charts of flux coming fromoperations and also investment….….The essential remark that I would highlight is the capacity shownby the enterprise to get rid of debt in spite of a very uncertain anddifficult context, this point shows a very reactive direction andvisionary ensuring the most skeptical…….We can, therefore, conclude that this enterprise has a strongcapacity to generate cash flow, this is not an easy path to follow,taking in consideration the importance of financial cycles and thetreasury requirements.BENEISHM 5variableM 8variable2011 -3,70 -3,32Clean Clean2,46 2,93 3,06 3,011,881,241,91 2,29 1,813,79 3,620,002,004,001 2 3 4 5 6 7 8 9 10 11Current ratio-500 000-400 000-300 000-200 000-100 0000100 000200 000300 000400 00020022003200420052006200720082009201020112012CFO (Cash flow from operations)CF form investing activities
0100020003000400050006000700080007638,34918,525,7in Mil USDfundinstitutionsotherINVESTMENT SUMMARYIt is a public enterprise, however, it is on our highest interest remarking that it is partially handled by funds, in fact taking inconsideration several approaches from financial history, when the latter needs liquidity, they sell massively the shares they own,producing sometimes important loose in terms of actives values.It is important to follow very carefully the needs they have,at the same time that their selling intentionsWe strongly believe that MM share is facing an excellent perspective. Indeed, the seriesof different evaluations show us growth perspectives for 11% from now to the next year.The enterprise presents a great chance, beyond its cost domination policy, it is a positivestrategy being performed by the enterprise letting us estimate a strong value for theupcoming years. We have also observed that the enterprise has strong chances ofproviding products that are rare that would consent increasing of prices. To conclude, wethink that the enterprise confirms it is highly profitable. Moreover, we have also observed the enterprise is located on a phase ofgrowth recovering on its cyclical character, taking in consideration from the cost control policy established that has endorsed andintentionally debt reduction in spite of an uncertainty phase. We have also detected that economic situation in the US finds itself in arecovering phase, and this is why it presents all the necessary indicators for the viability of the latter. A last idea, would be to make azoom on the moving average on the title having a recent growth, empirically, that announces a regain of activity, however thisindicator must not be appreciated more than it’s worth.INVESTMENT RISKThe business is affected by the level of demand in the construction industry, which is currently experiencing a significantdownturn. Activity in the infrastructure construction business is directly related to the amount of government funding available forsuch projects, which is very limited in light of the budget constraints being experienced by federal, state and local governments. Anydecrease in the amount of government funds available for such projects or any decrease in construction activity in general (including acontinued weakness in residential construction or commercial construction) could have a material adverse effect on our business,financial condition and results of operations.The business is seasonal in nature, and this causes our quarterly results to vary significantly. Quarterly results have variedsignificantly in the past and are likely to vary significantly from quarter to quarter in the future. Such variations could have a negativeimpact on the price of the common stock. Because a majority of the business is seasonal, unfavorable weather conditions and otherunexpected operational difficulties during peak construction periods could adversely affect operating income and cash flow and couldhave a disproportionate impact on the company’s results of operations for the full year.The customers participate in cyclical industries, which are subject to industry downturns. A majority of MLM revenues are fromcustomers who are in industries and businesses that are cyclical in nature and subject to changes in general economic conditions. Inaddition, since MLM operations are in a variety of geographic markets, our businesses are subject to the economic conditions in eachsuch geographic market.The results of operations are subject to significant changes in the cost and availability of fuel, energy and other raw materials.Major cost components in each of the businesses are the costs of fuel, energy and raw materials. Significant increases in the costs offuel, energy or raw materials or substantial decreases in their availability could materially and adversely affect MLM sales andoperating profits.The risk of become subject to significant clean-up, remediation and other liabilities under applicable environmental laws.MLM operations are subject to state, federal and local environmental laws and regulations, which impose liability for cleanup orremediation of environmental pollution and hazardous waste arising from past acts. Any future laws or regulations addressinggreenhouse gas emissions would likely have a negative impact on the business or results of operations, either through the impositionof raw material or production limitations, fuel-use or carbon taxes or emission limitations or reductions.
Football Field100 000150 000200 000250 000300 000350 000Forecast OFCFVALUATIONValuation:Valuation method used: We evaluated MLM using Discounted Cash Flow andMultiples Analysis. We are convinced that the most appropriate techniques for EXPare the Free Cash Flow to Equity (FCFE) and the Price/Earnings Ratio (PER). Theformer incorporates the long-term growth opportunity of the company, while thelatter reflects the market valuation. We found a 12 month target price of $107. TheHolding Period Return is 12.25% for 12 months.Discounted Cash Flow Model: Free Cash Flow to Equity (FCFE):Sales forecast: Regression Analysis and AssumptionsWe regressed the product revenues from the different business segments againstGDP and unemployment. The regression assumptions are the following:- GDPWe decided to use the Economist Intelligence Unit’s estimates because theirprevious projections have been impressively accurate. For full disclosure, the EIU’sestimates were within 0.6% accuracy from 2000 to 2005 where the economy was notunder stress. However, during the crisis period of 2006-2009, EIU’s predictions weremore inaccurate, within 1.2% accuracy.Actual Forecast2009 2010 2011 2012 2013 2014 2015 2016 2017 2018GDP growth rate -3.1 2.4 1.8 2.2 2.1 2.3 2.3 2.4 2.4 2.4- Unemployment rate:The concrete industry is strongly correlated with unemployment; much of this has todo with infrastructure efforts and fiscal policy—in times of how unemployment thegovernment will typically seek to stimulate the economy by pursuing infrastructuredevelopment, thereby creating jobs. As part of the annual budget, the ObamaAdministration released underlying economic assumptions earlier in the year. Forunemployment, the forecast is for an average of 7.6% in 2013, 9.2% in 2014, 8.1%in 2015 and 7.7% in 2016.yearSG&A Growth when Sales Growth: We believe the SG&A will be stable inpercentage of sales because headquarter administrative expenses will increase whenMartin Marietta Materials purchases to growth.Terminal Value Component Assumptions: Because the cash flows of MLM aretruly cyclic, the assumption of a constant perpetual growth rate after one cycle offorecasted cash flows is incorrect. Therefore, we apply the “Cyclic Terminal ValueMethod” to Firm Valuation; we found a terminal Value of 6,471,666 for MLM. It isassumed that the components of the free cash flow (FCF) have four phases: anActual Forecast2009 2010 2011 2012 2013 2014 2015 2016 2017 2018Unemployment rate 5.8 9.3 9.6 8.1 7.6 7.8 8.1 7.7 7.8 7.7107
Effective Tax rate 26% 10kRd 6.8% av cost of debt 10kRf 1.81% Fed 10 yr treas rateEquity risk premium 6.17% Damodaranβe 1.15 sur 2 annéesD/E 0.75 D/E+D 0.43βa 0.66 E/E+D 0.57Re 5.86%WACC 6.00% 0.5% spread addedg 2.4%Fama Frenchku 3.63%wacc 0.03424PER Quartile 1 Mean Quartile 3Quartile 29.90 46.32 59.50EPS 1.80 1.80 1.80Price 53.82 83.38 107.10MLMupward phase, followed by a “leveling off” or “peak” phase, followed by adownward phase, and a second “leveling off” or “trough” phase. These phases do notneed to be in this order and the cash flows can begin in the middle of any givenphase. The phases are labeled as: upward, peak, downward, and trough to mimic thebusiness cycle.Cost of Equity: The Cost of Equity was calculated by the CAPM model, using theFED 10-year Treasury bond rate of 1.81%, the expected market return of 6.17% andthe adjusted beta of 0.66 to reflect the Cost of Equity of 5.86%.Weighted average cost of capital: 0.5% spread is added to the WACC to accountfor future risk.With all the forecast, we found a target price of $108.95 with the FCFE method.Multiple Valuations:Price to Earnings Ratio (PER) and EV/EBITDA:We derived a target price range from $53.82 (bear case) to $107.10 (bull case), with$107 being our base case price target under the multiples-based valuation method.MLM’s peer group is currently trading at approximately 17x 2013 EV/EBITDA and47 2013 P/E. On our base case estimates, MLM is currently trading at 17.64x 2013EV/EBITDA and 62x 2013 P/E.We believe a target multiple of 18x 2013 EV/EBITDA and 62 PER is appropriate inour base case scenario. MLM has for the most time during the past 6 years traded ata premium in PER to its major competitors. In our view, MLM’s valuation premiumwill widen going forward given the following reasons:- The construction industry of the US is expected to rebound over the next few years.- MLM is focusing on reducing cost and improving its operations for being thelowest cost producer among its peers.The 2013 EV/EBITDA and P/E multiples of listed peers most comparable to MLMare as follows:EV/EBITDA Quartile 1 Mean Quartile 3Quartile 10.42 16.65 17.41*EBITDA 270 270 270= 2,814.42 4,494.75 4,700.06Price 61.30 97.90 102.38Dollar in millions PER EV/EBITDATXI TEXAS INDUSTRIES INC 89 40.96MLM MARTIN MARIETTA MATERIALS 62 14.59EXP EAGLE MATERIALS INC 56.9 27.27VMC VULCAN MATERIALS CO nm 18.11GVA Granite Construction Incorporated 30.47 9.43SHW The Sherwin-Williams Company 29.33 14.74USG USG Corporation nm 15.09MDU MDU Resources Group Inc. 33.32 5.81MAS Masco Corporation nm 12.47PWR Quanta Services, Inc. 23.14 10.73
APPENDIX. Appendix 1: History1939: the history began by an enterprise specializing in aggregate.1959: Superior stone merges with the American-Marietta Corporation, a national producer of construction materials,paints chemicals and other buildings products. That after the merge with the Glenn L. Martin Company, in 1961 whatbecome Martin Marietta Corporation, leader in aerospace, cement, aggregates, electronics & chemicals.1994: Martin Marietta Materials, incorporated as part of the Martin Marietta Corporation in 1993, appears on the NewYork Stock Exchange, with MLM symbol, after offering 19 per cent of common stock to the public. MLM financialmodel pursues growth strategy through the acquisition of quarries in South Carolina, Virginia and Georgia. MartinMarietta Materials purchases the aggregates business of Dravo Corporation, that shift the corporation at the second placeof aggregates producers in U.S. Then Martin Marietta Corporation merges with Lockheed Corporation to form LockheedMartin Corporation.1996: Lockheed Martin Corporation disposes of remaining interest in Martin Marietta Materials through a split-offtransaction, making Martin Marietta Materials a separate and independent entity. During the same time, Martin Mariettacontinues to purchases many quarries and that at this time her pursues opportunities for composite material technology,which will potentially be used on a wide range of applications.1997: Martin Marietta Materials purchases American Aggregates Corporation, expanding its aggregates business inIndiana and becoming a leading producer in Ohio, where it install its first composite bridge deck. Highlighting its fifthyear as a public company, Martin Marietta achieves over $1 billion in sales for the first time and establishes a strongcoast-to-coast platform for continued growth. Martin Marietta purchases Redland Stone in 1998, expanding aggregatesoperations into Texas and positioning the Company as the leading aggregates and asphalt provider in Houston and SanAntonio. Redland Stone provided an extensive rail network in Texas. Martin Marietta purchases an interest in MeridianAggregates Company, a Colorado-based producer that serves 14 western states; 11 acquisitions completed by the end ofthe year.2000: the Corporation embarked on the largest capital investment program in its history. With increased emphasis oninternal growth, major plant construction projects were initiated at the Freeport, Bahamas, quarry and locations near HotSprings, Arkansas; Parkersburg, West Virginia; Raleigh, North Carolina and Dallas/Ft. Worth, Texas. 2001 is animportant year for Martin Marietta, were he completes the purchase of Meridian Aggregates Company. Along with the1998 purchase of Redland Stone, Meridian is a key component of the western expansion strategy and significantlyenhances the Corporations rail distribution network. Martin Marietta Magnesia Specialties refractory business is sold toMinerals Technologies Inc. The Company brings on line its new, highly automated Bahamas Rock facility at Freeport,Bahamas. This state-of-the-art aggregates plant and ship-loading facility serves customers from Maryland to Texas, aswell as throughout the Caribbean. The Bahamas Rock facility is the largest, new plant investment in the Companyshistory. Martin Marietta reaches $1.5 billion in sales. The first two phases of a new enterprise-wide computer informationsystem is successfully implemented. This project replaces old systems with state-of-the-art technology that supports futuregrowth and enables better access to information. A record 13 acquisitions are completed. As a result of the extensivedistribution network established over the past several years, a record 23 percent of aggregates shipments were made viawater or rail.2002 to 2008: Martin Marietta recorded a great success of net earnings, EBITDA and free cash flow; Expansioncontinues in the Composite Products business. This includes the announcement of the opening of a manufacturing facility
in North Carolina where the Company will begin to assemble specialty composite truck trailers. The Company alsoacquired the rights to manufacture high strength composite sandwich panels for a variety of industries. Moreover MartinMarietta records safety performance (2004), strongest pricing environment in corporation history (2005) and MagnesiaSpecialties earnings from operations up 50% on a 16% increase in net sales in 2006. 11th consecutive quarter of decliningaggregates volume, with a 22% decline from the peak to year end 2008 and they have Heritage aggregates product linepricing increased 6.7%; volume decreased 13.1%. The same year, MLM record net sales of $167.2 million for SpecialtyProducts segment, net earnings of $176.3 million, or $4.20 per diluted share and capital expenditures of $258.2 millionfocused on capacity expansion and efficiency improvement projects.The last 3 year, MLM have resisted the international crisis, despite the consequence on the sector. In 2009, theyrecorded net earnings of $85.5 million, or $1.91 per diluted share, heritage aggregates product line pricing increase of1.9%, despite a volume decrease of 23.0%, record financial results by the Specialty Products segment, which providedearnings from operations of $35.7 million. Furthermore, effectively managed controllable costs as evidenced by a 17%decrease in cost of sales and an 8% decrease in selling, general and administrative expenses and they improved financialflexibility by securing two new credit facilities providing $230 million of incremental liquidity; issuing 3.8 million sharesof common stock providing net proceeds of $293.4 million; and reducing capital expenditures by $119 million. Theircomplete acquisition and successful integration of 3 quarries from CEMEX inc. They have a new record of employeesafety performance as measured by total injury incidence and lost time incidences rates. Martin Marietta is ranked #1“World’s Most Admired Company for Building Materials Industry” by Fortune Magazine and is only company inindustry selected to the InformationWeek 500 for eighth year in a row.2010: the company continued the same policy, its record on employee safety performance, as measured by a 14%reduction in Total Case Incident Rate from prior year. The net earnings were $97.0 million or $2.10 per diluted share andaggregates product line volumes increase for the first time in four years. The heritage aggregates product line volumeincreased of 5.3% and pricing decreased of 3.4%. In addition, the effective management of controllable costs, asevidenced by a 70-basis-point decreased in selling, general and administrative expenses as a percentage of net sales. Sameyear, it had a repayment of $217.6 million of Floating Rate Senior Notes through use of cash and an successful integrationof the acquisitions of an aggregates distribution facility in Port Canaveral, Florida and a sand and gravel business nearCharlotte, North Carolina. Martin Marietta is only company in industry selected to the InformationWeek 500 for ninthyear in a row.The last year, Martin Marietta improved employee safety performance as measured by the Corporation’s total injuryincidence and lost time injury rates, earnings per diluted share of $1.78, inclusive of $0.25 per diluted share impact ofbusiness development costs and the heritage aggregates product line pricing increase of 2.7% and volume decrease of3.5%. To pursues the effective management of controllable costs as evidenced by selling, general and administrativeexpenses decreasing $6.3 million, or 60 basis points. According to that, it made new acquisition of three aggregates-related businesses: aggregates, asphalt and ready mixed concrete operations in western San Antonio, Texas; aggregatessites, as well as vertically-integrated ready mixed concrete and asphalt plants and a road paving business, in and aroundDenver, Colorado, resulting from an asset exchange with Lafarge North America Inc. and a ready mixed concretecompany in Denver, Colorado. We can note the successful integration of the San Antonio acquisition and the strategicdivestiture of certain operations along the Mississippi River (“River District operations”) to facilitate the asset exchangewith Lafarge while maintaining balance sheet strength and financial flexibility. The capital expenditures included a newaggregates sales yard near Tampa, Florida and the initiation of construction of a new dolomitic lime kiln at the SpecialtyProducts’ Woodville, Ohio facility.
Appendix 2: Management TeamMembershipC. Howard NyePresident and Chief Executive Officer, Martin Marietta MaterialsC. Howard (Ward) Nye is President and Chief Executive Officer for Martin Marietta Materials. EffectiveJanuary 1, 2010, Mr. Nye was also elected to the Board of Directors. Mr. Nye served as the CompanysChief Operating Officer from 2006 to 2009. Immediately prior to joining Martin Marietta Materials in2006, he was employed by Hanson Aggregates North America for nearly 13 years holding variouspositions of increasing responsibility, most recently Executive Vice President.Mr. Nye received a bachelors degree from Duke University and a law degree from Wake Forest University. In addition tohis educational and industry background, Mr. Nye has been active in a number of various business, civic, and educationalorganizations, including serving as a member of the Board of Directors for the National Stone, Sand & Gravel Association(NSSGA), the American Road & Transportation Builders Association (ARTBA) and Romeo Guest Associates, Inc. Mr.Nye is also a member of the Duke University Alumni Board, as well as a former Gubernatorial appointee to the NorthCarolina Mining Commission.Holdings: 63,988 sharesAnne H. LloydExecutive Vice President, Chief Financial Officer and TreasurerAnne H. Lloyd is Executive Vice President, Chief Financial Officer and Treasurer for Martin MariettaMaterials. Ms. Lloyd has served as CFO since June 2005 and was elected Treasurer in March 2006. Ms.Lloyd joined Martin Marietta Materials in 1998 as Vice President and Controller and was promoted toChief Accounting Officer in 1999. Before joining Martin Marietta Materials, she was with Ernst & Young,LLP, an international public accounting firm.Ms. Lloyd is a graduate of the University of North Carolina at Chapel Hill. She holds a Bachelor of Science degree inBusiness Administration and is a Certified Public Accountant.Ms. Lloyd is active in various business, education and civic organizations. She currently serves as Treasurer, member ofthe Executive Committee and Board Member of the National Stone Sand and Gravel Association (NSSGA). She alsoserves on the SAFETEA-LU Reauthorization Committee of the NSSGA and the Blue Ribbon Panel of TransportationExperts for the National Surface Transportation Policy and Revenue Study Commission. Ms. Lloyd is a Board Member ofthe North Carolina Chamber of Commerce and serves on its Finance and Audit Committee. She is also a Member of theNC Chamber Infrastructure and Economic Development Policy Committee. Ms. Lloyd is a Board Member of TerraNitrogen Company, L.P. and serves as the chair of its Audit Committee and as a member of its Corporate Governance andNominating Committee.Holdings: 43,403 shares
Bruce A. VaioExecutive Vice President - President of Martin Marietta Materials - WestBruce A. Vaio is President of Martin Marietta Materials - West, headquartered in San Antonio, Texas, andis an Executive Vice President of the Corporation. Mr. Vaio was President and CEO of Redland StoneProducts Company from 1996 to 1998, when Martin Marietta Materials purchased it and formed theCompanys Southwest Division. After the Redland Stone purchase, Mr. Vaio served as President of Martin MariettasSouthwest Division from 1999 to 2006, until promoted to his current position. Before joining Redland Stone, he servedtwo years, from 1994 to 1996, as vice president and regional manager of Western Mobile Inc. in Denver, Colorado. Mr.Vaio holds a Bachelor of Arts degree in Political Science from the University of Denver and a Master of BusinessAdministration degree from the University of Phoenix.Holdings: 48,069 sharesRoselyn R. BarSenior Vice President, General Counsel and Corporate SecretaryRoselyn R. Bar is Senior Vice President and General Counsel for Martin Marietta Materials. She is alsoCorporate Secretary. Ms. Bar joined the Company in 1994 as assistant general counsel and assistantcorporate secretary. Before joining Martin Marietta Materials, she was corporate counsel at Sun America Inc. Prior toworking for Sun America, she was a corporate lawyer at Skadden, Arps, Slate, Meagher and Flom in New York and LosAngeles. Ms. Bar holds a bachelors degree from the University of Rochester and a law degree from the Brooklyn LawSchool. Ms. Bar serves as a member of the Legal Task Force and on the Council of Counsel of the National Stone, Sand& Gravel Association (NSSGA). She is a member of the New York, California, Florida, and American Bar Associations.Holdings: 39,069 sharesDana F. GuzzoSenior Vice President, Chief Accounting Officer and Chief Information OfficerDana F. Guzzo is Senior Vice President, Chief Accounting Officer and Chief Information Officer forMartin Marietta Materials. Ms. Guzzo joined Martin Marietta Materials in 2004 as Vice President,Financial Systems, Planning and Analysis. Before joining Martin Marietta Materials, she was with W. R.Grace & Co., a specialty chemical company. Ms. Guzzo is a graduate of Old Dominion University. Sheholds a Bachelor of Science degree in Business Administration and is a Certified Public Accountant.Donald A. McCunniffSenior Vice President, Human ResourcesDonald A. McCunniff is Senior Vice President of Human Resources for Martin Marietta Materials. Mr.McCunniff joined the Company in 2011 with over 20 years of human resources experience. Before joiningMartin Marietta Materials, Mr. McCunniff held various senior-level human resource positions atCenturyLink, Inc., Armstrong World Industries, Inc. and Honeywell International, Inc. He began hisprofessional career as an Army officer where he served in a variety of line and staff positions. . Mr.McCunniff is a Six Sigma black belt. He graduated from North Georgia College with a bachelors degree in PoliticalScience and received a masters degree in Public Administration from the University of San Francisco.Holdings: 1,819 shares
- Terminal Value’s evaluation2017Net Revenues 2 502 721 2038597Operating Expense 2 154 951Depreciation & Amortization 50 000Change in Working Capital 17 100CAPEX 50 000Wacc 6,00%Tax rate 26%Cycles inputsPhase Upward Peak Downward TroughPhase Length 6 3 4 3Periods Left in first Phase 5Cyclic growth 6,00% 0,50% -5,00% 0,50%Adjusted discount rates (wacc) 0,00% 5,48% 11,58% 5,48%Initial Cycle Terminal ValueCycle calculation k-cyclicNet Revenues 213,52% 48 644 001 22 781 491Operating Expense 213,52% 41 347 401 19 364 267Depreciation & Amortization 213,52% 916 814 429 372Change in Working Capital 213,52% 313 544 146 842CAPEX 213,52% 916 814 429 372Free Cash Flow 4 407 498 2 064 168TV 6 471 666The method of valuation specified by Copeland, Koller, and Murrin and Damodaran for firms with cyclic cash flows is toforecast the cash flows out one full cycle (possibly more if starting mid-cycle) and then use the cash flow one periodbeyond the cycle to produce a terminal value assuming a constant perpetual growth rate. Presumably, the perpetual growthrate should be set to represent any future cash flow cycles and any trends emerging within the future cycles (e.g. a steadyupward or downward drift) reasonably well. One can argue that the future cash flows are so distant, that any errorgenerated by such an assumption is minimal.To generate a perpetuity for the terminal value, calculate a ―k-cyclic‖, which is a calculation involving all of the cyclicgrowth rates and the adjusted discount rate. For each period within the cycle, take one plus the discount rate and divide itby one plus the growth rate of the associated cash flow.
- Target PriceEV 5 886 271,37 €debt outsanding 1 092 000,10 €equity value 4794271,27Shares out 45910,00104,430.005 spread is added to the Wacc to account for future risk.Effective Tax rate 26% 10kRd 6,8% av cost of debt 10kRf 1,81%Fed 10 yr treasrateEquity risk premium 6,17% Damodaranβe 1,15 sur 2 annéesD/E 0,75 D/E+D 0,43βa 0,66 E/E+D 0,57Re 6% wacc 0,05313WACC 6,00% =g 2,4%Fama Frenchku 3,63%wacc 0,03424*Using Fama French to calculate Wacc: We regressed the returns of the share price over the last 200 days with 3 factors(Mkt-Rf, SMB, HML) calculated daily founded in the site Fama French to find Ku.Coefficients Erreur-typeConstante-0,00020789 0,00096827RM-RF 0,0100735 0,00126993SMB 0,00645946 0,0024338HML 0,00356049 0,00263049
Appendix 7: Other Information about Industry Overview and Competitive Positioning- The cost of shipping cement is high over long distances. As a result, cement is generally sold from local sources.Barge and rail modes account for the remaining distribution modes. Much of the industry is still concentratedalong the Mississippi River system in the mid-west because of the ease of transport.- Domestic production does not satisfy the total U.S. cement consumption, which is filled by about 10 millionmetric tons of imported cement and cement clinker. About 90.2% of cement and clinker imported in 2008 camefrom five major countries: China, Canada, Columbia, Mexico, and the Republic of Korea.- The current economic downturn affected the US cement industry. From 2005 to 2010, 48 of 50 US Statesobserved a decreased in cement consumption. Most badly affected were Arizona (-69%), Florida (-68%), Nevada(-68%), Georgia (-61%) and California (-60%). The two states seeing a net increase were Louisiana and NordDakota (+17% although at a low level).Key point of industry:Heavy industry: The cost of facilities required to produce one million tons of cement is 150 million Euros it cost equalstheir sales for three years.High consumption of energy: Each ton of cement produced requires the equivalent of 60 to 130 kg of oil, or anaverage of 110 kWh.The production of greenhouse gas emissions: The only cement is responsible for 5% of global CO2 emissions.These emissions are due: 40% fuel to heat the limestone to 60% decarbonisation of the rock during heating.When the cement there is no fixed CO2, is taking to the water as opposed to taking the lime which sets the same amountof CO2 that is emitted during the decarbonation.Low need for labor: A modern plant one million tons capacity employs less than 150 people.The obligation to produce locally: The cost of road transport is equivalent to the cost of the product beyond 300 km(25 t payload per truck) and therefore limits the effective radius of inland transport. This constraint makes the cementmarket a regional market. However, the cost of maritime freight transport volumes compared (boats 35 000 tons) allowsintercontinental (per ton transported, it is cheaper to cross the Atlantic in a cargo of cement that move 300 km by road).Homogeneous characteristics: While the cement is produced from local natural materials, different depending onwhere a plant is, the finished product meets the same standards. Therefore, more than the quality of cement is itsavailability and customer service that are critical in the deed, after the course price.Consumption is strongly related to local development: Europe and North America, the market demand for cementhas increased dramatically during the twentieth century and the development of the industry has responded to the needs ofincreasing urbanization. After World War II, and despite a cyclical, the consumption of industrialized countries hasincreased by a factor of 6-8, until the oil shock of 1975. Since then, the so-called mature Western markets fell by about 20to 40%, the need for heavy infrastructure having been filled and replaced by the consumption of maintenance. However,over the past twenty-five years, some European countries (Greece, Portugal and Spain, for example) have doubled ortripled their consumption due to their high rate of growth (GDP)From one country to another, cement consumption per capita varies greatly depending on the geographic patterns (tunnelsand bridges in mountainous areas), the seismic constraints (Greece, Turkey) and climatologically (concrete highways inthe country north), local habits, population density and growth cycle. The European average in 2004 (source
CEMBUREAU) of 528 kg per capita, with peaks at 1221 kg for Luxembourg, 1166 kg for 963 kg for Spain and Greeceand hollow Sweden (192 kg) Latvia (200 kg) and the UK (216 kg)- Competition:Cement MultinationalsCement is partly produced by the major multinational cement firms such as Lafarge, Cemex, Holcim and HeidelbergCement. Between them the big four control approximately 40% of the integrated cement plants and 49% of theoperational capacity. 8 Smaller multinationals like Titan and Buzzi Unicem and homegrown producers like Ash GroveCement and Texas Industries take up the remaining share of the market.CEMEX: Cemex entered the US market in 1994 with the acquisition of the Balcones plant in Texas, which hadpreviously been owned by Lafarge. In the autumn of 2000 Cemex acquired the interests of the Texas-based cement,concrete and aggregates producer Southdown, Inc. Cemex now has 13 plants and 46 terminals stretching from Californiato Florida and up into the mid-west.According to the 2012 edition of the Global Cement Directory, Cemex has an integrated cement capacity of 12.6Mt/yr. Inthe first quarter of 2012, Cemex reported a sale growth in its US operations.In 2011 the group net sales in the US increased by 1% year-on-year to US$2.5bn. The EBITDA was a loss of US$100m.Cement sales volumes were down year-on-year by 2%.In the first quarter of 2012 the US operations reported net sales of US$684m, up by 35% from the same period in 2011.Operating EBITDA for the quarter was a loss of US$24m, an improvement on the US$45m loss made in the same quarterof 2011.Lafarge: After establishing a strong Canadian base in Richmond in 1956, the French building materials group Lafargeentered the US in 1981 with the takeover of US-based cement producer General Portland. Today Lafarge has a strongpresence in the US cement market, with a total of 10 cement plants and 10.4Mt/yr of integrated cement capacity.For 2011 annual report, Lafarge North American markets remained flat, reflecting the uncertain economic environment. Itsold 13.5Mt in the US and Canada, down on 13.6Mt sold in 2010. The groups operating income for cement in NorthAmerica was US$98.2m (- 6.7% compared to 2010). The US Lafarges total operations brought in US$1.89bn, down on2010 when it took US$2.06bn.Holcim: Swiss-based Holcim has eight plants at locations across the US, employs over 1800 people and has a capacity of15.3Mt/yr. Its plants are well spread out, in Alabama, Colorado, Missouri, Montana, South Carolina, Texas, Oklahomaand Utah.The group has the highest average US plant capacity among the multinationals, at 1.8Mt/yr. Part of this is due to its4Mt/yr Ste. Genevieve development in Ste. Genevieve County, Missouri, which came on stream in July 2009.While Holcim saw a 5.6% increase in its total cement sales in 2011 compared to 2010 and increased its sales in its NorthAmerican cement interests by 2.9%, the US saw only a minimal increase in cement sales. Its US sales rose by 2.7%,taking volumes from 11.1Mt in 2010 to 11.4Mt in 2011 due to the slight improvement of the US construction sector.In monetary terms, its sales and EBITDA in North America were both down in 2011, to US$3.27bn and US$380m fromUS$3.55bn and US$504m respectively.
Cement - Other multinationalsBuzzi Unicem: Italys Buzzi Unicem group operates nine cement plants in the US, with a total capacity of 9.5Mt/yr. Itshares ownership of the Louisville, Kentucky plant with Cemex. Buzzi reports that it has approximately 9% of the USmarket.Essroc: The Italcementi group operates cement plants in the US and the rest of North America under the Essroc name. Ithas 6.5Mt/yr of cement capacity in the US.Appendix 8 :ENVIRONMENTALTexas is subject to various federal, state and local environmental, health and safety laws and regulations. These laws andregulations govern, among other things: air emissions, wastewater discharges, investigations and remediation ofcontamination existing at current and former properties, etc...
Appendix 9: SWOT analysisSTRENGTHS- Leading position in its markets- Implanted in the two largest cement market- Well knowledge of markets’ evolution- Strategy based on acquisitions and synergiesWEAKNESSES- Slow adaptability of its expenses regarding tothe change of economy market- Regional position which limits shipments- Local player which has difficulties tocompete international companiesOPPORTUNITIES- Increase of the cement consumption for theyears to come- Recovery of the housing market USA. Itmight be slow to start, but once it gets itkeeps on going for a while- Government spending increased makes thedemand for the construction industry alsoincreaseTHREATS- Results can be affected by: weatherconditions, fluctuation on the costs of rawmaterials, energy, transportation- Business is cyclical and regional in nature- Adverse weather conditions- Availability of raw materials- Changes in energy costs including, withoutlimitation, natural gas and oil.- Changes in the demand for residentialhousing construction or commercialconstruction increases in interest rates,decreases in demand for constructionmaterials or increases in the cost of energy
IMPORTANT DISCLAIMERPlease read this document before reading this reportThis report has been written by Master 2 analysis financial, International Program students at FFBC, Lille 2 University inpartial fulfillment of their course requirements. It is intended to serve as an example of student work at the University,trying to make an investment advice.The document aims at presenting the operational, economical and financial characteristics of MARTIN MARIETTAMATERIALS in order to make a recommendation after estimating its stock price. It is based on publicly availableinformation and may not be complete of all relevant data.We also make an investment research on two listed companies in NYSE: Eagle Materials Inc and Texas Industries Inc.Students:- Thierry FOGUE – Thierry.firstname.lastname@example.org- Loic FOURNIER – email@example.com- Duy Anh NGUYEN – firstname.lastname@example.orgProfesor: Michel LEVASSEUR