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Martin Marietta Materials financial analysis
1. FINANCIAL ANALYSIS REPORT
Recommend: BUY
We are issuing a BUY rating on MLM stock because we believe that
the market is undervaluing the stock. Our different methods of
valuation gave us a target price range of 100-107. We expect the
MLM stock will be boosted in the short term when the economy of
the US rebound.In addition, the company's strengths can be seen in
multiple areas, such as its robust revenue growth, increase in net
income, largely solid financial position with reasonable debt levels
by most measures, solid stock price performance and growth in
earnings per share
HIGHLIGHTS:
Martin Marietta is an enterprise with a cyclical tempo and because
of it, several elements let us think that we are in decrease, which
projects a strong regain for the upcoming five years…
…It is also, an enterprise based on a strong and intensively
concurred sector demanding strong capital investment, therefore a
high negotiation power from providers and costumers…
…It is also an enterprise well based in the United States, developing
an external growth strategy, having as a goal to develop strategic
implantations, in order to strongly reduce transportation costs, which
are so important to the value chain.
12/12/2011
Martin Marietta’s announcement of
proposal with VULCAN ownership, the
change into 2 VULCAN shares vs 1 MLM
share.
05/07/2012
Chancellery court of DELAWARE rejects Martin
Marietta’s proposal because it revealed
confidential information about this subject
06/11/2012
Announcement of the
earning of Q3 2012
Price close: 95.32 Target 12 mouth: 107 Stock type: cyclical
EPS basic : 1.79 EPS diluted : 1.78 Cash dividend/share : 1.60
Net sales : 1.5 billion Net earnings :82.4 currency :$USD
Responsible for analysis:
Loic.fournier@live.fr
Team member:
duyanh.nguyen@hotmail.fr
thierry.foguembah@skema.edu
Please read the disclaimer at the end
of this report for important information
Dividends
2. ENTERPRISE PRESENTATION & HISTORY
Martin Marietta Materials (NYSE: MLM) is in
the aggregate, chemical, and composite material business. It is the
second largest producer of crushed stone, sand, and gravel in
the United States behind Vulcan Materials Company.
It is a leading U.S. producer of magnesia-based chemical
products used as additives inapplications including ceramics, paper,
sugar, animal feed, and water treatment. It produces dolomitic
lime used as a fluxing agent by the steel industry. It is a supplier
of fiber-reinforced polymer products for use in infrastructure such as
panels, bridge decks and transportation components such as truck
trailers andrailroad cars.
It was established as an independent company in 1996, spun off from
the newly created Lockheed Martin after having been part of Martin
Marietta since 1961. Itdates its origins back to 1939, when Superior
Stone, an aggregates company inRaleigh, North Carolina, was
founded. The company's corporate headquarters is located in
Raleigh.
1961: Martin Marietta formed by merger of the Glenn L. Martin
Company and American-Marietta Corporation
1994: Martin Marietta Corporation completed its initial public
offering 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 to
form Lockheed Martin
1996: Lockheed Martin splits off Martin Marietta Materials as a
separate and independent entity
GOURVERNANCE
C. Howard Nye
President and Chief Executive Officer, Martin Marietta Materials Holdings: 63,988 shares
C. Howard (Ward) Nye is President and Chief Executive Officer for
Martin Marietta Materials. Effective January 1, 2010, Mr. Nye was
also elected to the Board of Directors. Mr. Nye served as the
Company's Chief Operating Officer from 2006 to 2009. Immediately
prior to joining Martin Marietta Materials in 2006, he was employed
by Hanson Aggregates North America for nearly 13 years holding
various positions of increasing responsibility, most recently
Executive Vice President.
80%
4%
2% 2% 9%
3%
% Net sales per product 2011
Aggregates Asphalt Ready Mixed Concrete
Road Paving Magnesia-Based Chemicals Dolomitic Lime
0
100
200
300
400
500
600
700
800
2012 2011
711,2
483,4
151,6 149,1
213,1 217,4
305 295,3
Sales by sector nine mouth ended
Midest
Southeast
West
Spécialty
3. COMPETITORS
Competivity on this sector is really intense, noting that all enterprises
of this sector have suffered the impact of economic crisis in 2007,
and thereafter its consequences.
In fact, after Lehmann brother’s bankruptcy ,and undercapitalization
that they faced, a secondary effect being the justification of raw
materials , such as fuel has had important impact on these
enterprises margins.
Nevertheless the impact of politic choices in the United States has
lead us to come back to the analysis of 2009, with shares price
stabilization 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 top
trends , while the spending on household buildings and for other
purposes are having a decrease.
By using PORTER’s forces, we infer the competition character of
this sector .
- Power of new entrants is very limited, in fact we can justify it
by two major elements: scarcity of job careers on aggregates
available, and the necessary capital to get inside.
- As previously quoted, the suppliers force is relevant, we will
precisely remark the augmentation of fuel price and its
importance in value chain, energies represent 14% of value
estimate by the direct costs method.
- Despite of this scarcity in terms of aggregates in the south of
United States, we also highlight that costumer negotiation
power stays preeminent . Indeed, directly linked to the intense
competition, at the same time that there is no distinction on
products quality, the only reasonable selling justification is
price.
We can conclude that competitive advantage to develop is the
research of costs domination.
0
500000
1000000
1500000
2000000
2500000
3000000
3500000
4000000
2007 2008 2009 2010 2011
COGS
Sales
4. CORPORATE STRATEGY
MLM has his headquarters based in the United States, it delivers
aggregates in 31 states, Canada, Bahamas and Caribbean with 287
facilities. MLM estimates its 12,5 million tons of reserves are
enough for 50 years of production, even when these reserves are
variable from a place to another.
MLM strategy consists in developing a competitive advantage
around 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 strategic
implantation, in a general way in the United States, but also more
specifically in the southwest, especially from Texas to the west
coast.
It takes in consideration several elements, first of all, the migration
fluxes highly oriented to this region, subsequently, 74% of
aggregates consumption is done over there, et finally, this region
presents scarcity on available aggregates quantities, that eventually
will lead to price increase.
MM considers that the best way to spend less is by logistic
transportation of its products mostly by boat, all along the coasts
and the rivers. Indeed, ground transportation, costs around 15-45
cents usd/ ton per miles, 6-11 cents by train and only 4 to 1.2 cents
by boat.
Not only is there the Mississippi river on the south but also 2 other
rivers, where the three of them get together in a joint called the
three rivers, it is then a very strategic place for MM, since a very
long time the enterprise is organized and located under
circumstances that allow it to develop a strategic advantage of
costs domination .
migration
5. STRONG & WEAKNESSES
Diversifying means of Transport in order to reduce Costs.
As an outcome of consolidation and purchases over the last years, Martin Marietta
has gained access to various means of transport for its aggregates. As Martin
Marietta keeps transporting more aggregates by rail and water, embedded freight
costs reduce also overweight margins by less than if these shipments were
transported by truck. Most of the rail and water transportation happens in the
Southeast branch and the West branch. Though, the enlargement of MLM's rail
distribution network increases its dependence on railroad performance, such as track
congestion, crew availability, and the ability to negotiate favorable railroad shipping
contracts. Likewise, the aquatic distribution network increases MLM’s exposure to
risks such as negotiating favorable shipping contracts, fuel costs, charge or ship
availability, and weather troubles
Construction Weakens, Aggregate Demand Drops.
Most of MLM's aggregate products are for construction industry, so its results
depend somewhat on the power of the construction industry. The housing fall since
2007 has affected in a negative way MLM's business as new home construction fell,
reducing the number of residential homes to be built (and of course supplied with
aggregates). Whereas private residential construction is a small market for MLM, the
severe decreasing in activity impacts business.
Government Subsidy Lacks delay Construction
The stability of government-funded infrastructure projects provides isolation to a
general economic recession, but the level and timing of federal and state funding are
important in order to keep this stability. A lack of funds can delay current
construction and put new projects on hold. For example, the North Carolina
Department of Transportation has a lot of construction projects on hold due to a lack
of federal funding. Indeed, publicly-funded construction around the country is
decreasing due to budget deficits. Such deficits, especially in MLM's in the five most
important revenue-generating states such as North and South Carolina, will put a
obstruction 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, petroleum
coke and other forms of energy for production. Growing energy costs, affect
negatively on the production of MLM's aggregates, but also make their transport
more expensive, as mentioned above.
Weather Circumstances Can affect Aggregates Operations
The 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 of
the year, while the first and fourth quarters see lesser activity. Nonetheless, hostile
weather conditions can at any time reduce demand for MLM's products, at the same
time that increases costs and reduces production.Business in the southeastern U.S.
and the Bahamas is particularly vulnerable to interruption by hurricanes and tropical
storms or heavy rainfall, for example, dry weather causes low water levels and
results in reduced tonnage able to be shipped on a charge, while heavy rainfall and
flooding in Texas, Oklahoma, and Kansas can affect shipments and logistic
operations.
6. MARKET
The United States of America is the third most populous in the
word, and its economy is the largest in the word with GDP closed to $
1504bn in 2011, despite it has faced an economic downturn since
2008. In 2007, GDP expanded by nearly 2% year-on-year, but in 2008
growth was flat and in 2009 the country saw a 3.5% contraction in its
economy. In 2010, this contraction was reversed, with 3% growth. In
2011, 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, but
the 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 an
estimated installed capacity over 100Mt/yr. The 2012 edition of the
Global Cement Directory puts the country third in terms of active and
mothballed capacity (>113Mt/yr), behind China (>1400Mt/yr) and
India (>230Mt/yr). The current economic downturn affected the US
cement industry. From 2005 to 2010, the two states seeing a net
increase were Louisiana and Nord Dakota (+17% although at a low
level).
Forecast: The construction materials is currently engaged capacity
expansion. By 2012 more than 25 million metric tons of new capacity
is expected to come on line, representing more than $6 billion in
investment. Cconstruction in the United States, as estimated by the
Portland Cement Association (PCA), increased by 3% to 77.5 million
short tons in 2011. Building materials Consumption depends on the
seasons related to weather conditions. Demand for products is
generally cyclical and seasonal, depending on economic and
geographic conditions. PCA reported that it expects consumption to
increase by 3.7% in 2012 over the 2011 level. This will result to a
marginal improvement in non-residential constructions, an anticipated
15% improvement in new housing starts and an increase in the
cement-intensity of projects. Beyond 2012 the PCA estimates
accelerated expansion: 7.6% in 2013 and 14.1% in 2014. By 2016, it
expects cement consumption will increase by 35Mt/year.
Opportunities
- The recovery of the housing market USA. It might
be slow to start, but once it gets going it keeps on
going for a while
- Government spending increased makes the demand
for 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 wallboard
and cement industries.
- Changes in the demand for residential housing construction or
commercial construction
7. FINANCIAL STRUCTURE
The financial structure of MLM is clean, as we can observe
the graph showing the extent of Beneish, all accounts could
not be used manipulated.
First of all, we’d get interested on the working capital requirements,
and the working capital of this enterprise. These two measures
highlight 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 stretch
out its short term debts, in order to reduce de liquidity requirements.
We can confirm the different levers that have allowed these actions, in
particular, the debt lever to equity that has a lever going from 0.56 en
2006 to 1.19 in 2007.
These different operations show that the enterprise has known how to
make the good decisions in the right time. We can place on this
the current treasury ratio, and also the charts of flux coming from
operations and also investment….
….The essential remark that I would highlight is the capacity shown
by the enterprise to get rid of debt in spite of a very uncertain and
difficult context, this point shows a very reactive direction and
visionary ensuring the most skeptical…
….We can, therefore, conclude that this enterprise has a strong
capacity to generate cash flow, this is not an easy path to follow,
taking in consideration the importance of financial cycles and the
treasury requirements.
BENEISH
M 5
variable
M 8
variable
2011 -3,70 -3,32
Clean Clean
2,46 2,93 3,06 3,01
1,88
1,24
1,91 2,29 1,81
3,79 3,62
0,00
2,00
4,00
1 2 3 4 5 6 7 8 9 10 11
Current ratio
-500 000
-400 000
-300 000
-200 000
-100 000
0
100 000
200 000
300 000
400 000
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
CFO (Cash flow from operations)
CF form investing activities
8. 0
1000
2000
3000
4000
5000
6000
7000
8000
7638,3
4918,5
25,7
in Mil USD
fund
institutions
other
INVESTMENT SUMMARY
It is a public enterprise, however, it is on our highest interest remarking that it is partially handled by funds, in fact taking in
consideration 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 intentions
We strongly believe that MM share is facing an excellent perspective. Indeed, the series
of 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 positive
strategy being performed by the enterprise letting us estimate a strong value for the
upcoming years. We have also observed that the enterprise has strong chances of
providing products that are rare that would consent increasing of prices. To conclude, we
think that the enterprise confirms it is highly profitable. Moreover, we have also observed the enterprise is located on a phase of
growth recovering on its cyclical character, taking in consideration from the cost control policy established that has endorsed and
intentionally debt reduction in spite of an uncertainty phase. We have also detected that economic situation in the US finds itself in a
recovering phase, and this is why it presents all the necessary indicators for the viability of the latter. A last idea, would be to make a
zoom on the moving average on the title having a recent growth, empirically, that announces a regain of activity, however this
indicator must not be appreciated more than it’s worth.
INVESTMENT RISK
The business is affected by the level of demand in the construction industry, which is currently experiencing a significant
downturn. Activity in the infrastructure construction business is directly related to the amount of government funding available for
such projects, which is very limited in light of the budget constraints being experienced by federal, state and local governments. Any
decrease in the amount of government funds available for such projects or any decrease in construction activity in general (including a
continued 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 varied
significantly in the past and are likely to vary significantly from quarter to quarter in the future. Such variations could have a negative
impact on the price of the common stock. Because a majority of the business is seasonal, unfavorable weather conditions and other
unexpected operational difficulties during peak construction periods could adversely affect operating income and cash flow and could
have 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 from
customers who are in industries and businesses that are cyclical in nature and subject to changes in general economic conditions. In
addition, since MLM operations are in a variety of geographic markets, our businesses are subject to the economic conditions in each
such 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 of
fuel, energy or raw materials or substantial decreases in their availability could materially and adversely affect MLM sales and
operating 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 or
remediation of environmental pollution and hazardous waste arising from past acts. Any future laws or regulations addressing
greenhouse gas emissions would likely have a negative impact on the business or results of operations, either through the imposition
of raw material or production limitations, fuel-use or carbon taxes or emission limitations or reductions.
9. Football Field
100 000
150 000
200 000
250 000
300 000
350 000
Forecast OFCF
VALUATION
Valuation:
Valuation method used: We evaluated MLM using Discounted Cash Flow and
Multiples Analysis. We are convinced that the most appropriate techniques for EXP
are the Free Cash Flow to Equity (FCFE) and the Price/Earnings Ratio (PER). The
former incorporates the long-term growth opportunity of the company, while the
latter reflects the market valuation. We found a 12 month target price of $107. The
Holding Period Return is 12.25% for 12 months.
Discounted Cash Flow Model: Free Cash Flow to Equity (FCFE):
Sales forecast: Regression Analysis and Assumptions
We regressed the product revenues from the different business segments against
GDP and unemployment. The regression assumptions are the following:
- GDP
We decided to use the Economist Intelligence Unit’s estimates because their
previous projections have been impressively accurate. For full disclosure, the EIU’s
estimates were within 0.6% accuracy from 2000 to 2005 where the economy was not
under stress. However, during the crisis period of 2006-2009, EIU’s predictions were
more inaccurate, within 1.2% accuracy.
Actual Forecast
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
GDP 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 to
do with infrastructure efforts and fiscal policy—in times of how unemployment the
government will typically seek to stimulate the economy by pursuing infrastructure
development, thereby creating jobs. As part of the annual budget, the Obama
Administration released underlying economic assumptions earlier in the year. For
unemployment, the forecast is for an average of 7.6% in 2013, 9.2% in 2014, 8.1%
in 2015 and 7.7% in 2016.
year
SG&A Growth when Sales Growth: We believe the SG&A will be stable in
percentage of sales because headquarter administrative expenses will increase when
Martin Marietta Materials purchases to growth.
Terminal Value Component Assumptions: Because the cash flows of MLM are
truly cyclic, the assumption of a constant perpetual growth rate after one cycle of
forecasted cash flows is incorrect. Therefore, we apply the “Cyclic Terminal Value
Method” to Firm Valuation; we found a terminal Value of 6,471,666 for MLM. It is
assumed that the components of the free cash flow (FCF) have four phases: an
Actual Forecast
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Unemployment rate 5.8 9.3 9.6 8.1 7.6 7.8 8.1 7.7 7.8 7.7
107
10. Effective Tax rate 26% 10k
Rd 6.8% av cost of debt 10k
Rf 1.81% Fed 10 yr treas rate
Equity risk premium 6.17% Damodaran
βe 1.15 sur 2 années
D/E 0.75 D/E+D 0.43
βa 0.66 E/E+D 0.57
Re 5.86%
WACC 6.00% 0.5% spread added
g 2.4%
Fama French
ku 3.63%
wacc 0.03424
PER Quartile 1 Mean Quartile 3
Quartile 29.90 46.32 59.50
EPS 1.80 1.80 1.80
Price 53.82 83.38 107.10
MLM
upward phase, followed by a “leveling off” or “peak” phase, followed by a
downward phase, and a second “leveling off” or “trough” phase. These phases do not
need to be in this order and the cash flows can begin in the middle of any given
phase. The phases are labeled as: upward, peak, downward, and trough to mimic the
business cycle.
Cost of Equity: The Cost of Equity was calculated by the CAPM model, using the
FED 10-year Treasury bond rate of 1.81%, the expected market return of 6.17% and
the 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 account
for 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 and
47 2013 P/E. On our base case estimates, MLM is currently trading at 17.64x 2013
EV/EBITDA and 62x 2013 P/E.
We believe a target multiple of 18x 2013 EV/EBITDA and 62 PER is appropriate in
our base case scenario. MLM has for the most time during the past 6 years traded at
a premium in PER to its major competitors. In our view, MLM’s valuation premium
will 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 the
lowest cost producer among its peers.
The 2013 EV/EBITDA and P/E multiples of listed peers most comparable to MLM
are as follows:
EV/EBITDA Quartile 1 Mean Quartile 3
Quartile 10.42 16.65 17.41
*EBITDA 270 270 270
= 2,814.42 4,494.75 4,700.06
Price 61.30 97.90 102.38
Dollar in millions PER EV/EBITDA
TXI TEXAS INDUSTRIES INC 89 40.96
MLM MARTIN MARIETTA MATERIALS 62 14.59
EXP EAGLE MATERIALS INC 56.9 27.27
VMC VULCAN MATERIALS CO nm 18.11
GVA Granite Construction Incorporated 30.47 9.43
SHW The Sherwin-Williams Company 29.33 14.74
USG USG Corporation nm 15.09
MDU MDU Resources Group Inc. 33.32 5.81
MAS Masco Corporation nm 12.47
PWR Quanta Services, Inc. 23.14 10.73
11. APPENDIX
. Appendix 1: History
1939: 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 what
become 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 New
York Stock Exchange, with MLM symbol, after offering 19 per cent of common stock to the public. MLM financial
model pursues growth strategy through the acquisition of quarries in South Carolina, Virginia and Georgia. Martin
Marietta Materials purchases the aggregates business of Dravo Corporation, that shift the corporation at the second place
of aggregates producers in U.S. Then Martin Marietta Corporation merges with Lockheed Corporation to form Lockheed
Martin Corporation.
1996: Lockheed Martin Corporation disposes of remaining interest in Martin Marietta Materials through a split-off
transaction, making Martin Marietta Materials a separate and independent entity. During the same time, Martin Marietta
continues 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 in
Indiana and becoming a leading producer in Ohio, where it install its first composite bridge deck. Highlighting its fifth
year as a public company, Martin Marietta achieves over $1 billion in sales for the first time and establishes a strong
coast-to-coast platform for continued growth. Martin Marietta purchases Redland Stone in 1998, expanding aggregates
operations into Texas and positioning the Company as the leading aggregates and asphalt provider in Houston and San
Antonio. Redland Stone provided an extensive rail network in Texas. Martin Marietta purchases an interest in Meridian
Aggregates Company, a Colorado-based producer that serves 14 western states; 11 acquisitions completed by the end of
the year.
2000: the Corporation embarked on the largest capital investment program in its history. With increased emphasis on
internal growth, major plant construction projects were initiated at the Freeport, Bahamas, quarry and locations near Hot
Springs, Arkansas; Parkersburg, West Virginia; Raleigh, North Carolina and Dallas/Ft. Worth, Texas. 2001 is an
important year for Martin Marietta, were he completes the purchase of Meridian Aggregates Company. Along with the
1998 purchase of Redland Stone, Meridian is a key component of the western expansion strategy and significantly
enhances the Corporation's rail distribution network. Martin Marietta Magnesia Specialties' refractory business is sold to
Minerals 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, as
well as throughout the Caribbean. The Bahamas Rock facility is the largest, new plant investment in the Company's
history. Martin Marietta reaches $1.5 billion in sales. The first two phases of a new enterprise-wide computer information
system is successfully implemented. This project replaces old systems with state-of-the-art technology that supports future
growth and enables better access to information. A record 13 acquisitions are completed. As a result of the extensive
distribution network established over the past several years, a record 23 percent of aggregates shipments were made via
water or rail.
2002 to 2008: Martin Marietta recorded a great success of net earnings, EBITDA and free cash flow; Expansion
continues in the Composite Products business. This includes the announcement of the opening of a manufacturing facility
12. in North Carolina where the Company will begin to assemble specialty composite truck trailers. The Company also
acquired the rights to manufacture high strength composite sandwich panels for a variety of industries. Moreover Martin
Marietta records safety performance (2004), strongest pricing environment in corporation history (2005) and Magnesia
Specialties earnings from operations up 50% on a 16% increase in net sales in 2006. 11th consecutive quarter of declining
aggregates volume, with a 22% decline from the peak to year end 2008 and they have Heritage aggregates product line
pricing increased 6.7%; volume decreased 13.1%. The same year, MLM record net sales of $167.2 million for Specialty
Products segment, net earnings of $176.3 million, or $4.20 per diluted share and capital expenditures of $258.2 million
focused 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, they
recorded net earnings of $85.5 million, or $1.91 per diluted share, heritage aggregates product line pricing increase of
1.9%, despite a volume decrease of 23.0%, record financial results by the Specialty Products segment, which provided
earnings 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 financial
flexibility by securing two new credit facilities providing $230 million of incremental liquidity; issuing 3.8 million shares
of common stock providing net proceeds of $293.4 million; and reducing capital expenditures by $119 million. Their
complete acquisition and successful integration of 3 quarries from CEMEX inc. They have a new record of employee
safety 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 in
industry 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 and
aggregates product line volumes increase for the first time in four years. The heritage aggregates product line volume
increased of 5.3% and pricing decreased of 3.4%. In addition, the effective management of controllable costs, as
evidenced by a 70-basis-point decreased in selling, general and administrative expenses as a percentage of net sales. Same
year, it had a repayment of $217.6 million of Floating Rate Senior Notes through use of cash and an successful integration
of the acquisitions of an aggregates distribution facility in Port Canaveral, Florida and a sand and gravel business near
Charlotte, North Carolina. Martin Marietta is only company in industry selected to the InformationWeek 500 for ninth
year in a row.
The last year, Martin Marietta improved employee safety performance as measured by the Corporation’s total injury
incidence and lost time injury rates, earnings per diluted share of $1.78, inclusive of $0.25 per diluted share impact of
business development costs and the heritage aggregates product line pricing increase of 2.7% and volume decrease of
3.5%. To pursues the effective management of controllable costs as evidenced by selling, general and administrative
expenses 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; aggregates
sites, as well as vertically-integrated ready mixed concrete and asphalt plants and a road paving business, in and around
Denver, Colorado, resulting from an asset exchange with Lafarge North America Inc. and a ready mixed concrete
company in Denver, Colorado. We can note the successful integration of the San Antonio acquisition and the strategic
divestiture of certain operations along the Mississippi River (“River District operations”) to facilitate the asset exchange
with Lafarge while maintaining balance sheet strength and financial flexibility. The capital expenditures included a new
aggregates sales yard near Tampa, Florida and the initiation of construction of a new dolomitic lime kiln at the Specialty
Products’ Woodville, Ohio facility.
13. Appendix 2: Management Team
Membership
C. Howard Nye
President and Chief Executive Officer, Martin Marietta Materials
C. Howard (Ward) Nye is President and Chief Executive Officer for Martin Marietta Materials. Effective
January 1, 2010, Mr. Nye was also elected to the Board of Directors. Mr. Nye served as the Company's
Chief Operating Officer from 2006 to 2009. Immediately prior to joining Martin Marietta Materials in
2006, he was employed by Hanson Aggregates North America for nearly 13 years holding various
positions of increasing responsibility, most recently Executive Vice President.
Mr. Nye received a bachelor's degree from Duke University and a law degree from Wake Forest University. In addition to
his educational and industry background, Mr. Nye has been active in a number of various business, civic, and educational
organizations, 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 North
Carolina Mining Commission.
Holdings: 63,988 shares
Anne H. Lloyd
Executive Vice President, Chief Financial Officer and Treasurer
Anne H. Lloyd is Executive Vice President, Chief Financial Officer and Treasurer for Martin Marietta
Materials. 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 to
Chief 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 in
Business Administration and is a Certified Public Accountant.
Ms. Lloyd is active in various business, education and civic organizations. She currently serves as Treasurer, member of
the Executive Committee and Board Member of the National Stone Sand and Gravel Association (NSSGA). She also
serves on the SAFETEA-LU Reauthorization Committee of the NSSGA and the Blue Ribbon Panel of Transportation
Experts for the National Surface Transportation Policy and Revenue Study Commission. Ms. Lloyd is a Board Member of
the North Carolina Chamber of Commerce and serves on its Finance and Audit Committee. She is also a Member of the
NC Chamber Infrastructure and Economic Development Policy Committee. Ms. Lloyd is a Board Member of Terra
Nitrogen Company, L.P. and serves as the chair of its Audit Committee and as a member of its Corporate Governance and
Nominating Committee.
Holdings: 43,403 shares
14. Bruce A. Vaio
Executive Vice President - President of Martin Marietta Materials - West
Bruce A. Vaio is President of Martin Marietta Materials - West, headquartered in San Antonio, Texas, and
is an Executive Vice President of the Corporation. Mr. Vaio was President and CEO of Redland Stone
Products Company from 1996 to 1998, when Martin Marietta Materials purchased it and formed the
Company's Southwest Division. After the Redland Stone purchase, Mr. Vaio served as President of Martin Marietta's
Southwest Division from 1999 to 2006, until promoted to his current position. Before joining Redland Stone, he served
two 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 Business
Administration degree from the University of Phoenix.
Holdings: 48,069 shares
Roselyn R. Bar
Senior Vice President, General Counsel and Corporate Secretary
Roselyn R. Bar is Senior Vice President and General Counsel for Martin Marietta Materials. She is also
Corporate Secretary. Ms. Bar joined the Company in 1994 as assistant general counsel and assistant
corporate secretary. Before joining Martin Marietta Materials, she was corporate counsel at Sun America Inc. Prior to
working for Sun America, she was a corporate lawyer at Skadden, Arps, Slate, Meagher and Flom in New York and Los
Angeles. Ms. Bar holds a bachelor's degree from the University of Rochester and a law degree from the Brooklyn Law
School. 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 shares
Dana F. Guzzo
Senior Vice President, Chief Accounting Officer and Chief Information Officer
Dana F. Guzzo is Senior Vice President, Chief Accounting Officer and Chief Information Officer for
Martin 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. She
holds a Bachelor of Science degree in Business Administration and is a Certified Public Accountant.
Donald A. McCunniff
Senior Vice President, Human Resources
Donald 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 joining
Martin Marietta Materials, Mr. McCunniff held various senior-level human resource positions at
CenturyLink, Inc., Armstrong World Industries, Inc. and Honeywell International, Inc. He began his
professional 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 bachelor's degree in Political
Science and received a master's degree in Public Administration from the University of San Francisco.
Holdings: 1,819 shares
19. - Terminal Value’s evaluation
2017
Net Revenues 2 502 721 2038597
Operating Expense 2 154 951
Depreciation & Amortization 50 000
Change in Working Capital 17 100
CAPEX 50 000
Wacc 6,00%
Tax rate 26%
Cycles inputs
Phase Upward Peak Downward Trough
Phase Length 6 3 4 3
Periods Left in first Phase 5
Cyclic 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-cyclic
Net Revenues 213,52% 48 644 001 22 781 491
Operating Expense 213,52% 41 347 401 19 364 267
Depreciation & Amortization 213,52% 916 814 429 372
Change in Working Capital 213,52% 313 544 146 842
CAPEX 213,52% 916 814 429 372
Free Cash Flow 4 407 498 2 064 168
TV 6 471 666
The method of valuation specified by Copeland, Koller, and Murrin and Damodaran for firms with cyclic cash flows is to
forecast the cash flows out one full cycle (possibly more if starting mid-cycle) and then use the cash flow one period
beyond the cycle to produce a terminal value assuming a constant perpetual growth rate. Presumably, the perpetual growth
rate should be set to represent any future cash flow cycles and any trends emerging within the future cycles (e.g. a steady
upward or downward drift) reasonably well. One can argue that the future cash flows are so distant, that any error
generated 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 cyclic
growth rates and the adjusted discount rate. For each period within the cycle, take one plus the discount rate and divide it
by one plus the growth rate of the associated cash flow.
20. - Target Price
EV 5 886 271,37 €
debt outsanding 1 092 000,10 €
equity value 4794271,27
Shares out 45910,00
104,43
0.005 spread is added to the Wacc to account for future risk.
Effective Tax rate 26% 10k
Rd 6,8% av cost of debt 10k
Rf 1,81%
Fed 10 yr treas
rate
Equity risk premium 6,17% Damodaran
βe 1,15 sur 2 années
D/E 0,75 D/E+D 0,43
βa 0,66 E/E+D 0,57
Re 6% wacc 0,05313
WACC 6,00% =
g 2,4%
Fama French
ku 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-type
Constante
-
0,00020789 0,00096827
RM-RF 0,0100735 0,00126993
SMB 0,00645946 0,0024338
HML 0,00356049 0,00263049
21. 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 concentrated
along 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 million
metric tons of imported cement and cement clinker. About 90.2% of cement and clinker imported in 2008 came
from 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 States
observed 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 Nord
Dakota (+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 equals
their sales for three years.
High consumption of energy: Each ton of cement produced requires the equivalent of 60 to 130 kg of oil, or an
average 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 amount
of 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 cement
market a regional market. However, the cost of maritime freight transport volumes compared (boats 35 000 tons) allows
intercontinental (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 on
where a plant is, the finished product meets the same standards. Therefore, more than the quality of cement is its
availability 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 cement
has increased dramatically during the twentieth century and the development of the industry has responded to the needs of
increasing urbanization. After World War II, and despite a cyclical, the consumption of industrialized countries has
increased by a factor of 6-8, until the oil shock of 1975. Since then, the so-called mature Western markets fell by about 20
to 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 or
tripled 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 (tunnels
and bridges in mountainous areas), the seismic constraints (Greece, Turkey) and climatologically (concrete highways in
the country north), local habits, population density and growth cycle. The European average in 2004 (source
22. CEMBUREAU) of 528 kg per capita, with peaks at 1221 kg for Luxembourg, 1166 kg for 963 kg for Spain and Greece
and hollow Sweden (192 kg) Latvia (200 kg) and the UK (216 kg)
- Competition:
Cement Multinationals
Cement is partly produced by the major multinational cement firms such as Lafarge, Cemex, Holcim and Heidelberg
Cement. Between them the big four control approximately 40% of the integrated cement plants and 49% of the
operational capacity. 8 Smaller multinationals like Titan and Buzzi Unicem and homegrown producers like Ash Grove
Cement 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 had
previously 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 California
to 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. In
the 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 quarter
of 2011.
Lafarge: After establishing a strong Canadian base in Richmond in 1956, the French building materials group Lafarge
entered the US in 1981 with the takeover of US-based cement producer General Portland. Today Lafarge has a strong
presence 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. It
sold 13.5Mt in the US and Canada, down on 13.6Mt sold in 2010. The group's operating income for cement in North
America was US$98.2m (- 6.7% compared to 2010). The US Lafarge's total operations brought in US$1.89bn, down on
2010 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 of
15.3Mt/yr. Its plants are well spread out, in Alabama, Colorado, Missouri, Montana, South Carolina, Texas, Oklahoma
and Utah.
The group has the highest average US plant capacity among the multinationals, at 1.8Mt/yr. Part of this is due to its
4Mt/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 North
American 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 from
US$3.55bn and US$504m respectively.
23. Cement - Other multinationals
Buzzi Unicem: Italy's Buzzi Unicem group operates nine cement plants in the US, with a total capacity of 9.5Mt/yr. It
shares ownership of the Louisville, Kentucky plant with Cemex. Buzzi reports that it has approximately 9% of the US
market.
Essroc: The Italcementi group operates cement plants in the US and the rest of North America under the Essroc name. It
has 6.5Mt/yr of cement capacity in the US.
Appendix 8 :
ENVIRONMENTAL
Texas is subject to various federal, state and local environmental, health and safety laws and regulations. These laws and
regulations govern, among other things: air emissions, wastewater discharges, investigations and remediation of
contamination existing at current and former properties, etc...
24. Appendix 9: SWOT analysis
STRENGTHS
- Leading position in its markets
- Implanted in the two largest cement market
- Well knowledge of markets’ evolution
- Strategy based on acquisitions and synergies
WEAKNESSES
- Slow adaptability of its expenses regarding to
the change of economy market
- Regional position which limits shipments
- Local player which has difficulties to
compete international companies
OPPORTUNITIES
- Increase of the cement consumption for the
years to come
- Recovery of the housing market USA. It
might be slow to start, but once it gets it
keeps on going for a while
- Government spending increased makes the
demand for the construction industry also
increase
THREATS
- Results can be affected by: weather
conditions, fluctuation on the costs of raw
materials, energy, transportation
- Business is cyclical and regional in nature
- Adverse weather conditions
- Availability of raw materials
- Changes in energy costs including, without
limitation, natural gas and oil.
- Changes in the demand for residential
housing construction or commercial
construction increases in interest rates,
decreases in demand for construction
materials or increases in the cost of energy
25. IMPORTANT DISCLAIMER
Please read this document before reading this report
This report has been written by Master 2 analysis financial, International Program students at FFBC, Lille 2 University in
partial 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 MARIETTA
MATERIALS in order to make a recommendation after estimating its stock price. It is based on publicly available
information 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.foguembah@skema.edu
- Loic FOURNIER – loic.fournier@live.fr
- Duy Anh NGUYEN – duyanh.nguyen@hotmail.fr
Profesor: Michel LEVASSEUR