Martin Marietta Corp. (MLM) Stock Valuation Report

Analyst: Mason Gregory Martin Marietta Corp. (MLM)
Stock Valuation Report
Martin Marietta Corp. (NYSE: $MLM)
Finance 129: Student Managed Investment Fund (SMIF)
K.C. Chen, Ph.D., CFA
(Theodore F. Brix Endowed Chair in Finance)
Analyst: Mason Gregory
December 15, 2016

Table of Contents
Executive Summary
I. Recommendation: Buy or Sell (At Price) or Hold 1
II. Investment Positives 1
III. Investment Risks 1
Main Stock Reports
IV. Overview of Company 2
V. Historical Performances 3
A. Historical Financial Statements 3
B. Common-sized Financial Statements 3
C. Historical: NOPLAT, Invested Capital, ROIC, and Free Cash Flow 6
VI. Computation of Intrinsic Values 11
A. Valuation Models: Which DCF and Relative Valuation Models 10
B. Assumptions 13
C. Estimation of Weighted Average Cost of Capital 16
D. Free-Cash-Flows for the next 10 Years 20
E. Computation of Continuing Values 21
1. Discussion of Various Approaches 21
F. Enterprise Values 22
G. Intrinsic Values 24
H. Comparison of Intrinsic Value and Market Value Per Share 24
VII. Conclusion 25
VIII. References 27
IX. Appendix 28

1
Executive Summary
I. Recommendation: Buy/Sell (Price)? Or Hold
I would recommend holding our current position in Martin Marietta; however, I
would recommend selling our position if the stock price ever crossed the $300 per share
price.
II. Investment Positives (At Least 3)1
Martin Marietta’s Sector Strength
Given the current president-elect and recently elected Republican-majority
congress, there is strong favor for an increase in infrastructure spending. This means
large amounts of government spending on materials. Martin Marietta will be one of the
companies that benefits from the government infrastructure spending. The recently
approved FAST Act will provide $300 million into the sector
Martin Marietta’s Operating Performance
Martin Marietta has been able to compete with comparable companies within the
industry from an operational performance. For example, Martin Marietta’s operational
profitability is 17.48% of total revenues, and Martin Marietta’s profit margin is 11.03
percent. This is very competitive to Vulcan Materials margins which are 10.38% and
19.40% respectively.
Martin Marietta’s Growth
Analyzing the historical financial statements for Martin Marietta for the past five years, I
have been able to see the growth in revenues, cash flows from operating activities, and
profitability margins. Martin Marietta is getting bigger and bigger and becoming an even
more operationally efficient company.
III. Investment Risks (At Least 3)1
Speculation
1
Analyst’s Note: This section is from Value Line (2015) and recent news articles relating to
industry
2
This unstable sales growth will cause a bias when forecasting future sales growth rates. The
analyst will have to use best judgment and economic conditions to make a forecasted sales
growth rate.
3
From our financial statements, amortization and depreciation were lumped together into a single

Analyst: Mason Gregory Martin Marietta Corp.
2
Since the recent election, there has been a massive growth within the industry’s
stock prices. The Student Managed Investment Fund’s position in these companies has
appreciated 20.40% just since the election and this has primarily been done because of
speculation on infrastructure spending. The president-elect has voiced opinion for the
infrastructure spending but there has yet to be an official action.
Potential Downturn in the Economy
After the election there has been talk of an impending recession, this is based
around the economic policies of the president-elect and the meeting of the Federal
Reserve in December. At this meeting, Janet Yellen has given strong hints and allusions
to the first interest rate hike. There is also evidence to suggest that this first interest rate
hike will be the first of many in the upcoming year. Analysts are warning of a potential
recession.
Competition
After the election the speculation of the infrastructure play and the potential
government spending would be enough to draw in new competition and decrease the
portion received from the government per company.
IV. Overview of Martin Marietta Corporation
Martin Marietta Materials was formed in 1969 after the merger of American-
Marietta Corporation and Glen L. Martin Company (Martin Marietta, 2016). Today, this
American based materials company operates throughout twenty-six different states and
across four different countries: United States, Canada, Caribbean Islands, and the
Bahamas Islands. In 1994 Martin Marietta was listed on the New York Stock Exchange,
and today Martin Marietta is a member of the Standard and Poor’s 500-company index.
In 2015, Martin Marietta had 3.54 billion dollars in revenues and making it one of
the top companies in the raw materials industry. Martin Marietta operates through a
collection of material products such as: aggregates, ready-mixed concrete, asphalt,
cement, and cement treated materials. The prominent business and growth driver for
Martin Marietta is the increased spending in infrastructure by the United States’ federal
and state government. In 2016, the United States’ congress passed the FAST Act and

3
granted 305 million dollars in infrastructure rebuilding and the funding for this act is
slowly making its way down to Martin Marietta and the materials industry.
In the 3rd quarter earnings for 2016, Martin Marietta was able to report that the
aggregate section of their company had expanded by 9% and that the gross profit margin
for the company had increased by 210 basis points (Martin Marietta, “MLM Delivers
Record Q3 Performance) Looking forward for value drivers, we turn to the current
president-elect and his proposed policy of repatriating overseas money with a brief tax
holiday, short-term lowered tax rates, and using the tax income on infrastructure spending
which Martin Marietta is one of the largest suppliers in the United States.
In regards for the top competitors all vying for a piece of the infrastructure
spending there are several United States based companies: Vulcan Materials Company
(Alabama), Eagle Materials Incorporated (Texas), and USG Corporation (Illinois)
(CSIMarket.com, 2016)
V. Historical Performance
a. Historical Financial Statements
For the purpose of the valuation of Martin Marietta, I will be using the historical
financial statements for 2011 to 2015 at the company’s year-end. I have sourced the
historical financial statements from Morningstar.com, and there is the possibility of a
slight bias. This bias derives from the simplification of the financial statement’s line
items, and had I pulled financial data directly from Martin Marietta’s annual reports
might not have been simplified and condensed.
Utilizing the financial statements, I will first common-size the financial
statements, then I will focus on: Net Operating Profit Less Adjusted Taxes (NOPLAT),
Invested Capital, Return on Invested Capital (ROIC), and finally free cash flows (FCF).
Historical Balance Sheets, Income Statements and Statement of Cash Flows are attached
below and then attached as Income Statement Table 1 (pg.28), Balance Sheet Table 2
(pg. 29), Statement of Cash Flows can be found at Table 3 (pg. 30) in the Appendix.
b. Common-sized Financial Statements
Purpose

4
When analyzing financial statements, looking at the year over year shows the
actual dollar amount; however, there is a bias due to the varying size. To common-size a
financial document you divide all line items by a common base figure and this gives
percentages, which makes year-to-year standardized form (Investopedia, 2005)
Elimination of the bias due to size, common-sized financial statements allow for time
series analysis (year-over-year) and intra-firm comparison. For the Martin Marietta
financial statements, I decided to use yearly revenues instead of total assets as a base
figure.
Key Items
Through common-sized financial statements we are able to quickly analyze key items
that would not readily be see without being common-sized. For example, through
common sizing we are able to see different margins such as: operating, net income, and
gross profit margins. Despite the importance of these margins, the best outcome of
common-sized financial statements would be the sales growth year-over-year. The logic
behind this is that historical sales growth gives analysts and idea of what future sales
growth might be like and using the future sales the analysts can forecast the value of a
firm.
Sales Growth
The sales growth rate for Martin Marietta, as seen in Appendix Table 1 (pg. 28),
the sales growth rate for the last several years has not been stable or constant. The time-
series analysis shows the range of sales growth has been as low as 5% or as high as 37
percent.2
What this gives insight to be that under the economic conditions of 2011 to
2015, Martin Marietta did not expand as the economy did through the economic
recovery. Several explanations for this are not explained through financial statements and
can hypothesized on; for example, there is the possibility of costs of materials being very
volatile. However, this would be reflected under the common-sized cost of revenue and
2
This unstable sales growth will cause a bias when forecasting future sales growth rates. The
analyst will have to use best judgment and economic conditions to make a forecasted sales
growth rate.

5
for Martin Marietta the cost of revenue has been fairly stable for the past five years. The
next hypothesized reason would be the inability by management to secure revenue
contracts. This factor would not be evident through financial statement analysis.
Gross Profit Margin
Gross profit margin is merely the amount of revenue minus the cost it takes to
produce the revenue. In normal financial statements gross profit is usually negligent since
it does not represent an accurate net revenue stream. In common-sized analysis we are
able to see how well the firm is at manufacturing efficiency and reducing costs of
revenue, as well as how the firm’s management is utilizing their pricing strategies (Fiore,
2013). For firm’s the size of Martin Marietta, the gross profit margin would be affected
through sheer size and benefits of economies of scale. Historically, Martin Marietta
seems to be benefiting through some sort of efficiency increase or cost reduction because
the firm has been able to improve their gross profit margin over the last five years.
Operating Profit Margin
Operating margin is the net revenues after a firm has paid off operating expenses,
such as: wage expenses, general expenses, administrative expenses, and research and
development expenses. The operating profit margin is also the firm’s net revenue before
any taxes have been paid (Investopedia, 2005). The general consensus is a firm with a
high operating profit margin, the better off the firm will be in the long run. Operating
profit is the basis for many analysts’ valuations of firms and is important for firm
managers to be mindful of and actively trying to improve.
Martin Marietta has been improving their operating profit margin over the last
five years, as seen in Table 1.0 (pg. 28).This is incredibly beneficial for the company
considering the firm has had such a volatile growth rate in sales. The ability for Martin
Marietta to produce more profit regardless of sales helps maintain the value of the
company, even in tough years.
Net Profit Margin

6
The net profit margin is what is left over after a company has realized all their
expenses, tax provisions, and income from discontinuing operations. The net profit
margin is the percent of revenues that can be disbursed to creditors and shareholders. The
net profit margin as an individual percent is relevant to the yearly analysis, but as a time-
series (Year-over-year) it is beneficial for analyzing the operational management of the
company.
c. Historical: NOPLAT, Invested Capital, ROIC, and Free Cash Flows
Net Operating Profit Less Adjusted Taxes (NOPLAT)
Koller, Goedhart, and Wessels defines net operating profit less adjusted taxes,
NOPLAT from here on out, as profit from core business operations minus any non-
operational expenses and costs associated with finance (Koller). Finding NOPLAT is the
first step in finding out what a firm’s free cash flows. NOPLAT is calculated two
different methods; these are seen as top down and bottom up methods.
The bottom-down method is calculated by taking EBIT add back amortization and
this creates an adjusted EBITA. From the adjusted EBITA you minus operating cash
taxes.3
NOPLAT = (EBIT + Amortization)-Operating Cash Taxes
Operating cash taxes are all the taxes a firm must pay that are associated with
operational activities. The equation for operating cash taxes is as follows:
Op. Cash Taxes = Income Tax Provision + [Interest Expense *(1 – Tax
Rate)] – Tax on Interest Income + (Change in Deferred Taxes)
3
From our financial statements, amortization and depreciation were lumped together into a single
line item. There is no way from the historical statements to separate, so for NOPLAT calculations
we added zero for amortization.

7
After calculating the bottom-down method, you must check the accuracy of your
work by reconciling the net income. If your two NOPLAT calculations balance out to
zero, then you are able to use your NOPLAT. The reconciliation of the net income is the
top down approach and the equation is as follows:
NOPLAT = Net income + increase (–decrease) in net deferred taxes + after-
tax interest expense + loss (–gain) from discontinued operations – after-tax
interest received
For Martin Marietta the historical NOPLAT has been increasing dramatically over
the last four years. This can be seen in the table below as well as Table 5.0 (pg.31) in the
appendix.
(In Millions) 2015 2014 2013 2012
EBITA 480 315 218 156
OPERATING
CASH TAXES
-54.43 164.85 -1.20 -18.91
NOPLAT 425.58 479.85 216.80 137.09
Cumulative
Growth Rate
210% 250% 58% -15%
This excerpt shows the cumulative growth, and as you can see the NOPLAT had
grown significantly in 2014. This was mostly through expansion of asset base,
specifically an increase net plant, property, and equipment. The investments into the net
plant, property, and equipment not only were significant for NOPLAT, but for Martin
Marietta’s revenue streams which during the 2013-2014-year grew 37.20 percent.
Invested Capital and Return on Invested Capital

8
Investopedia defines invested capital as, “the total amount of money raised by a
firm through the issuance of shares and debt.” (Investopedia.com, 2005) This particular
performance is not stated on any financial statement since it is the combination of
working capital, net plant property and equipment, intangible assets and other non-
operating assets. This excludes operating revenues and leaves on money earned through
capital investments. The exact equation is as follows:
Invested Capital= Working Capital (Operating Assets-Operating Liabilities)
+ Net PPE + Intangible assets (Including Goodwill) + Other Non-Current
Assets.
For Martin Marietta the historical level of invested capital was roughly around 2.9
billion dollars; however, from 2013 to 2014 the invested capital levels nearly tripled, as
seen in Table 6.0 (pg. 32). The increased levels of invested capital came from a drastic
increase in Net Plant Property and Equipment, as well as a large jump in reported
Goodwill on the balance sheet. For every increase in one side of the balance sheet there
must be an equal and opposite reaction elsewhere. For Martin Marietta the balancing
action came from the purchase of Texas Industries and the total acquisition of all shares
outstanding.
After calculating the amount of invested capital for Martin Marietta, we are able
to use these numbers and the calculated NOPLAT, from above, to find the company’s
return on invested capital.

9
ROICt =
!"#$%&!
!"#$%&$' !"#$%"&!!!
Koller, Goedhart andWessels (2010, p. 40) define ROIC as the return earned by
the company for every dollar invested. This measurement is an incredibly important
return since it is usually compared to the weighted average cost of capital and is an
indicator of management’s ability to generate revenue. When the ROIC of a company is
greater than the WACC then the firm creates value; alternatively, if ROIC is below the
WACC then the firm is destroying value and it is time for the firm to reevaluate.
For Martin Marietta through the calculations, historical RONIC and it was
incredibly volatile after the analysis in Table 5.0 (pg. 31). There was an upward trend
until 2014 where the RONIC doubled then dropped off below the levels before the jump.
The table below is a sample from Table 5.0 (pg. 31) in the Appendix.
MLM RONIC (Sampled from Table 5.0)
2015 2014 2013 2012
NOPLAT 425.58 479.85 216.80 137.09
I.C. (t-1) 6839 2988 2914 2902
RONIC 6.22% 16.06% 7.44% 4.72%
Based upon my calculations the firm has had significant levels of RONIC;
however, due to the level of the WACC, 8.71 percent, we can deduct that the firm in
recent years has been destroying value. This may be a short-term destruction of value and
Martin Marietta is setting them up for a long-term return. We shall see.

10
Free Cash Flows
Dr. K.C. Chen and Dr. Amir Jassim have defined free cash flows as the after tax
profits from operations, plus non-cash deductions, and less investments in operating
capital, capital expenditures, and other assets (Chen & Jassim, 2014). The list below
shows the steps taken to calculate the historical free cash flows for Martin Marietta in
2015 through 2012.
1. NOPLAT (Net Operating Profit Less Adjusted Taxes)
2. Depreciation (Historical)
3. Gross Cash Flow = (NOPLAT + Depreciation)
4. Investments in Operating Working Capital
5. Capital Expenditures
6. Investment into Intangible Assets
7. (Increase) or Decrease in Other Assets
8. Decrease or (Increase) in Accumulated Comprehensive Income
9. Gross Investment = (4) +(5) +(6) +(7) +(8)
10. Free Cash Flow = (3) – (9)
Historically speaking, Martin Marietta has had a significant level of growth of free
cash flows, seen in Table 8.0 (pg. 33), and less the prior year where gross investments
were significantly larger than gross cash flows. The growths in free cash flows will be
become the basis for which we base our assumptions for future cash flows and the
valuation methods.

11
VI. Computation of Intrinsic Values
A. Valuation Models: Which DCF and Relative Valuation Models
For the purpose of the paper and valuation, we will be using several different
methods to forecast future values necessary for valuation calculations. These include the
enterprise discounted cash flows method, EBITDA multiple method, and relative
valuation method.
Enterprise Discounted Cash Flows Method
The Enterprise discounted cash flows (EDCF) method uses project future cash
flows that are then discounted back annually to the present value at the cost of debt,
weighted average cost of capital. This method is two-fold one is based upon the
assumption of the future and the next part is the summation of all future cash flows after
the ten year forecast. The steps used to calculate the EDCF are as follows:
1. Forecast free cash flows (10 years)
1a. Find the value of operations (VO)4
𝑉𝑂 =
𝐹𝐶𝐹!
(1 + 𝑊𝐴𝐶𝐶)!
!"
!!!
+
𝐹𝐶𝐹!
(1 + 𝑊𝐴𝐶𝐶)!
+ ⋯
𝐹𝐶𝐹!"
1 + 𝑊𝐴𝐶𝐶 !"
+
𝐶𝑉!"
(1 + 𝑊𝐴𝐶𝐶)!"
2. Find the Enterprise Value (EV):
Enterprise Value equals = VO (1a.) + Non-Operating Assets
3. Value of Equity (VoE)
VoE = EV – Interest Bearing Debt
4. Intrinsic Value per share
4
Analyst’s Note: The calculation of VO includes the value of CO (continuing operations), which is
the sum of all future free cash flows after 10 years. We are assuming that the company will
continue forever, the going concern assumption.

12
IV = VoE/(Number of Shares Outstanding)
The actual calculations and assumptions used to forecast future cash flows based
upon this theory will be discussed later on.
EBITDA Multiple Method
The next model is used as a complement to the EDCF model and uses EBITDA to
calculate the continuing value (CV). Koller et. al (2010) state that EBITDA is more
accurate for creating an enterprise value multiple because amortization and depreciation
are non-cash expenses, which are sunk-costs of historical capital expenditures. This
valuation method is often used by outsiders to determine the price of a company and if it
is properly valued. Investopedia (Investopedia EBITDA Multiple, 2016) states that a firm
with a lower multiple may potentially be undervalued and a firm with a high multiple
may be overvalued. To calculate a potential EBITDA multiple, the equation is as follows.
𝐸𝐵𝐼𝑇! + 𝐷𝐴! = (
𝐸𝑉
𝐸𝐵𝐼𝑇𝐷𝐴
)!
Note: The EBITDA for the dividing number, is an assumption that is based upon
historical trend of EBITDA for the firm.

13
Relative Valuation Model
This model is useful for valuation but unlike the other two models, the relative
valuation model is not an absolute and does not use forecasted future cash flows to
determine price. The relative model in this projection was the Price-to-Earnings multiple.
𝑃𝑟𝑖𝑐𝑒 = 𝐸𝑃𝑆! +
𝑃
𝐸
Noted: The (P/E) is equal to the intrinsic value for the firm leading up to time (n)
(
𝑃
𝑒
) = 𝐼𝑛𝑡𝑟𝑖𝑛𝑠𝑖𝑐 𝑉𝑎𝑙𝑢𝑒! =
𝐷!
(1 + 𝐾𝑒)!
+
𝐷!
(1 + 𝐾𝑒)!
…
𝐷!
(1 + 𝐾𝑒)!
+
𝑃!
(1 + 𝐾𝑒)!
This relative modeling is used more often as an accuracy checker for the absolute
methods of forecasting and modeling.
B. Assumptions
For valuation models to work an analyst needs to make specific operating
assumptions in so that NOPLAT can be estimated, which is the basis for the free cash
flows. These future free cash flows are the basis of several valuation models. In
particular, there are assumptions to be made about sales growth, NOPLAT-to-sales ratio,
EBIT-to-sales, depreciation-to-sales, and capital assumptions. There were also
assumptions that needed to be made for the estimation of weighted average cost of
capital. The weighted average cost of capital assumptions will be discussed later on in
this paper.

14
Sales Growth (Panel B. Table 10, pg. 36)
This is the most important factor since it is where NOPLAT will be calculated from.
There are several different methods that are used to determine future sales growth:
bottom-up and top-down and hybrid growth. Bottom-up derives the sales growth from
company driven data; such as, historical sales growth. Top-down is based on the
assumption that growth is derived from macro-economic conditions. Hybrid approach
incorporates both measures into one sales growth assumption. The most commonly used
sales growth predictor is the hybrid method, since it relies on company specific data and
macro-economic assumptions. For the sales growth forecast for Martin Marietta, the data
was derived using historical sales growth, 19.70% in 2015, and the historical trend has
been very volatile. Based upon the Value Line analysis for Martin Marietta, the estimated
sales growth for 2018-2020 was set at 8 percent; however, since this report is slightly
dated I estimated the initial forecasted sales growth closer to 2015’s sales growth and
then over time I approached the Value Line forecast (Value Line, 2015).5
EBIT-to-Sales & NOPLAT-to-Sales (Panel A, Table 10, pg. 36)
NOPLAT-to-sales is derived from the EBIT-to-sales calculation and the
forecasted marginal tax rate into the future. Before the EBIT-to-sales forecast, first we
examined the forecasted marginal tax rate and we used the Value Line analysis of 38% to
remain constant into the future. However, this is slightly biased since the current
president-elect has proposed cutting the current capital tax rate down to 15 percent.
5
Analyst Note: For Martin Marietta to expand the firm acquires and merges with existing
companies. This type of growth cannot be forecasted and therefore the future cash flows and
sales growth are slightly biased.

15
Moving forward we examined the historical growth of the EBIT to sales via the
common-sized income statement. We can see the significant increase over the last 5 years
in EBIT/Sales. For the purpose of the valuation we are setting the initial EBIT/Sales
growth close to 2015’s 13.56 percent then gradually increasing over the next seven years.
I made the assumption that after seven years of increase that the company would begin to
plateau off.
Following the estimation of sales growth and EBIT-to-Sales, we are now able to
calculate the NOPLAT-to-Sales. Taking the forecasted sales (after growing it at the
assumed rate) we multiply by the forecasted EBIT/sales ratio to get the forecasted EBIT
amount. Using this amount, we then take EBIT and deduct the amount of income taxes,
marginal tax rate of 38% indefinitely, and have the NOPLAT for the next ten years. From
this NOPLAT, we add depreciation, subtract changes in working capital, subtract capital
expenditures, and ± change in other assets.
Depreciation-To-Sales, Working Capital-to-Sales, Capital Expenditures-to-Sales, Other
Assets-to-Sales (Panel A, Table 10.0, pg. 36)
The assumptions for the above ratio are all based upon historical trends and
averages per ratio. For depreciation we would expect that the current ratio of 7.46%
would remain roughly constant for the immediate future, but as assets age and are sold
off this number would decrease to six percent for the remaining five years. However, this
number may increase as Martin Marietta is known to grow through mergers and
acquisitions.

16
Working capital ratio follows similar guidelines as depreciation, and that we
believe that the current ratio shall hold for the next five years.
Capital Expenditure ratio is rather unique in that 2013 was a massive capital
expenditure, which we have analyzed throughout the report and since then the capital
expenditures have decreased significantly. For the future assumptions of this ratio I
believe the amount of capital expenditures will increase from 0.48% in 2015 to 3.3% in
2022 because the assets will age and depreciate as they will be used. For the remaining
four years I believe the capital expenditure will level off at 2% of total sales.
Other assets to sales ratio is biased in the historical trend since Martin Marietta
acquired a large portion of other assets in the merger. The firm’s common sized other
assets to sales ratio jumped from 2% to 20% and then decreased to 16% in the following
year. Due to the trend of decreasing post-merger I believe that Martin Marietta will
continue to shed other-assets from the current 16% down to a manageable and more
productive 8 percent.
C. Estimation of Weighted Average Cost of Capital
Estimation for Cost of Debt
For Martin Marietta, the company had several bonds outstanding and we used
these as the basis for the estimation of cost of debt. However, despite several different
methods, we chose to use the weighted average yield to maturity as the closest estimation
for cost of debt. Using Morningstar’s bond analysis for Martin Marietta it became evident
that some of the outstanding bonds did not have a yield to maturity. Using Martin
Marietta’s bonds that were similar sized we approximated the missing yield to maturity.

17
Next to calculate the weighted yield to maturity we found the weight of each of
the bonds outstanding from the total debt. Once the individual weights were calculated,
we multiplied the yield to maturity by the weights and summed up the products. This
summation gave us the cost of debt for Martin Marietta, which is 3.3237 percent. Next
for the Weighted Average Cost of Capital we needed the after tax cost of debt, and
therefore we multiplied the cost of debt by one minus the tax rate of 34.50% giving us the
after tax cost of debt of 2.12 percent.
Estimation for Cost of Equity
For the estimation of the cost of equity the method that has been taught to us in
school is to utilize the Capital Asset Pricing Model (CAPM):
𝐾! = 𝑟! + 𝛽×[𝐸 𝑟! − 𝑟!]
rf = Risk Free Rate
β = Levered Up Industry Risk
[E(rm) - rf] = Expected Market Risk Premium
From the CAPM model we needed to calculate/estimate three different variables
in order to estimate the cost of capital.
Risk Free Rate
For the risk free rate, we wanted to use the historical rate from the 10-year bond,
which we found from the United States’ Treasury website. We found the historical rate to
be 2.24% and the market, and considering we are using this rate to forecast future cash
flow we must take the likelihood of future rate changes into account (United States

18
Treasury, n.d.). Based upon the financial community expecting the Federal Reserve to
increase the 10-year rate by .25% per quarter. Therefore, we estimated the risk free rate
for the CAPM model to be 2.24% plus 1.00% (.25% x 4 hikes) to become 3.24 percent.
Expected Market Risk Premium
The expected market risk premium is the expected market return less the risk free rate
from before. There are various methods used to predict the market risk premium but the
most common is via surveying people. Three professors Pablo Fernandez, Alberto Ortiz,
and Isabel F. Acin created a survey of the risk free rate and market risk premium of over
40 countries. The professors then took the average of the survey answers and reported
each result divided by nationality. The professors’ survey of the 1983 people for the
United States reported an average market risk premium of 5.5 percent in 2015
(Fernandez, Ortiz, Acin p. 3, 2015). We used this 5.5% as the market risk premium for
our CAPM calculation.
Beta (Levered Up Industry Risk)
For the last variable of the CAPM we needed to calculate Martin Marietta’s beta.6
There
are several sources from which one can pull a company’s beta; however, each source is
slightly different in their calculations and no two betas are the same. For our analysis we
calculated the beta using five years of historical returns, Table 9.0 (pg.34), and then
compared this to the market returns during that time. After running the regression and
smoothing out the company beta, we compared Martin Marietta to its competitor and then
6
Earlier in the semester, per assignment, a detail analysis and paper was written out for the
Company’s beta. Therefore, I have simplified the analysis.

19
relevered the average between the two. This series of computations gave us a levered
industry beta of 1.27 (Table 9.1, pg. 35).
Using all these estimations and imputing them into the CAPM equation we were able to
calculate the cost of equity to be 10.23 percent. Found in Table 12 (pg. 37) Panel C.
Weights of Debt and Equity per Market Value
Before the WACC can be calculated we first needed to calculate weight of total
interest bearing debt and equity per total debt and market equity. The market value of the
equity for Martin Marietta was calculated by the share price for the close on 12/31/2015
by the total number of shares outstanding. This gave us a total market equity value of
$8.806 billion. Next we needed to calculate the total amount of interest bearing debt that
the firm had. To do this we added up the short-term debt, long-term debt, pensions and
other debt from the 2015 balance sheet. This gave us a calculated interest bearing debt
total of $1.983 billion. Using total interest bearing debt plus market value of equity we
found the weights of each equity and debt, 81.62% and 18.38% respectively. (Table 12.0,
pg. 37)
Computation of WACC (Table 12.0, pg. 37)
For several valuation methods we want to find the amount of future cash flows that
will be available to investors, and these valuation models require the future cash flows to
be discounted back at the WACC. Using the weighted average cost of capital equation,
we were taught in lessons, we were able to calculate the base WACC.

20
𝑊𝐴𝐶𝐶 =
𝐷
𝐷 + 𝐸
×𝑘!× 1 − 𝑇 +
𝐸
𝐷 + 𝐸
×𝑘!
Note: In this equation D= total interest bearing debt, E = market value of equity,
D+E = enterprise value, and T = marginal tax rate
After plugging in all the variable and assumptions into the WACC equation we resulted
in the WACC for Martin Marietta of 8.74 percent. 7
D. Free Cash-Flows for the next 10 Years
Based upon the operational assumptions made we are able to create a forecasted
cash flows for the next 10 years for Martin Marietta, and can be seen in the Table 11.0
(pg. 37). The analysis of the free cash flows for the next ten years show as a percent of
sales that the free cash flows have been decreasing except for a couple of years were
there were changes in other assets and capital expenditures. We understand that the
forecasted free cash flows are comparable to historical cash flows. However, historical
cash flows do not take into account significant events such as the merger and acquisition
in 2013. The last assumption that needed to be made is that the WACC cost of capital
remains constant over the next ten years. While this is not important to the calculation of
future free cash flows it is important when discounting these cash flows back to the
present value.
The above assumption is important because in order to discount the future cash
flows back to present value the free cash flow is divided by one plus the WACC raised to
7
Analyst Note: In Financial Theory WACC is supposed to be less than the ROIC, but in this case
WACC is more expensive due to the CFO’s decision to not take on debt for financing and to offer
equity (the more costly of the capital funding) instead.

21
the power of n. Doing this on the free cash flows for Martin Marietta gives a cumulative
present value of $5.336 billion.
E. Computation of Continuing (Terminal) Values
The continuing value or also known as the terminal values approaches yet another
assumption when using valuation models. The assumption is the going-concern of a
corporation; in theory a business has the ability to run forever since ownership is not
directly tied to a single living person. Therefore, when using valuation models one must
forecast these indefinite cash flows. These indefinite future cash flows that are so far
away that that they cannot be forecasted accurately. There are various approaches as to
which each valuation model calculates these terminal values.
1. Discussion of Various Approaches
For this project we wanted to use several different valuation methods: Enterprise
EDCF Valuation Model and EBITDA Multiple Valuation Model. Each of these models
has a different way of computing the continuing value. The continuing value is the
beginning number from which the intrinsic value is derived. The calculations for each
model can be seen in the Table 12.0 (pg. 37).
Enterprise DFC Valuation Model
The Enterprise DCF (EDFC) model calculates the terminal value using forecasted
NOPLAT and RONIC, and historical WACC and growth percentage. The forecasted
NOPLAT assumption can be found in the earlier portion of this paper. However, the
assumed RONIC used for this model is based on the analyst’s decision for the firm’s
relative strength to the market. The range that we were given to make RONIC

22
assumptions off of was that WACC ≤ RONIC ≤ ROIC (historical). 8
For my RONIC, I
used the WACC since this is the minimum rate that must be achieved. The following
equation is what was used to calculate the EDFC’s continuing value:
𝐶𝑉!" =
𝑁𝑂𝑃𝐿𝐴𝑇!"×(1 + 𝑔)(1 −
𝑔
𝑅𝑂𝑁𝐼𝐶!"
)
𝑊𝐴𝐶𝐶 − 𝑔
After plugging in my assumptions and forecasted values, the continuing value for
the EDCF for MLM is calculated to be $9.011 billion.
EBITDA Multiple Valuation Model
The EBITDA model uses operational profitability plus non-cash expenses as a
multiplier for calculations of value. For this model EBIT, depreciation and amortization
are all forecasted under the same assumption for the EDCF model. There fore these two
models are based upon the same assumptions up until the next point. The equation for the
continuing value under the EBITDA model gives more insight of the next assumed
variable.
𝐶𝑉!" = (𝐸𝐵𝐼𝑇!" + 𝐷𝐴!")×(
𝐸𝑉
𝐸𝐵𝐼𝑇𝐷𝐴
)!"
The confusing variable is the EV/EBITDA multiple for year ten is using the
enterprise value for the current year, which has not been calculated yet. This
EV/EBITDA multiple is assumed through historical trend analysis for the company.
Where has there EBITDA multiple been heading, down or up. After looking at the
historical trends, we analyzed that Martin Marietta’s EV/EBITDA would be decreasing
due to the rapidly increasing EBITDA. Therefore we assigned a 2022 EBITDA multiple
of 8.50 to the equation. After plugging in the assumptions and forecasted variables we
8
Analyst Note: For MLM, The WACC is greater than the historical ROIC, thus this given range of
forecasted RONIC is biased.

23
were able to calculate a continuing value of $8.77 billion, which is slightly smaller than
the EDCF calculated intrinsic value.
F. Enterprise Values
Having calculated the continuing value for each method, the next step would be to
calculate the enterprise value for each method. Koller et al. define enterprise as the value
of the core business operations plus non-operating assets (Koller, Goedhart, Wessels,
2015). The enterprise value for both methods connects our two sets of assumptions:
financial and operational.
EDCF
Through the prior calculations of the future cash flows and the continuing value, I
was able to calculate the enterprise value. The first thing worth noting that the firm has
no non-operating assets on their balance sheet, and we must assume that this does not
change into the future.
𝐸𝑉 = 𝑃𝑉 𝐹𝐶𝐹 + 𝐶𝑉 + 𝑁𝑜𝑛 − 𝑂𝑝. 𝐴𝑠𝑠𝑒𝑡𝑠
The final total for the EDCF enterprise value equaled $14.347 billion, and using this
number we shall then be able to find the intrinsic value for the EDCF model.
EBITDA Multiple Model
Again, through the prior calculation I was able to find the amount for each variable
to calculate the enterprise value for the EBITDA model. Using the same formula as the
EDCF, but different numbers, I calculated the EBITDA enterprise value to be $14.113
billion dollars.

24
G. Intrinsic Values
The calculation for intrinsic value per share is calculated the same way for both
valuation methods. The intrinsic value of company is the value of future cash flows and
continuing value less any cost of debt and this is value of the company without any
regard to the market. For our valuation models we will be using the same cost of debt
which was calculated earlier on to be $1.983 billion.
𝐼𝑉 = 𝐸𝑉 − (𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐷𝑒𝑏𝑡)
This intrinsic value gives us the market cap of the company based on the
assumptions and calculations of the analyst.
EDCF (IV) = EV (14347) – Value of Debt (1983) = $12.364 billion
EBITDA (IV) = EV(14113) – Value of Debt (1983) = $12.130 billion
H. Comparison of Intrinsic Value and Market Value Per Share
From the intrinsic value, the value per share is able to be calculated by dividing
total intrinsic value by shares outstanding. This will give the forecasted future value of
the company based upon our analysis. From these valuation models we are able to tell
whether the current share price of the company is overvalued or undervalued.
If the firm’s intrinsic value per share is overvalued then the possibility for a large
return is diminished because fundamentally the market is overpaying for the stock based
on other factors other than actual value.
If a firm’s intrinsic value per share is undervalued then for some reason the
investors have not been buying the stock and the shares are under what the firm is

25
actually worth. This creates the opportunity to generate a substantial return for
shareholders.
Based upon the assumptions and calculations for the EDCF model we derived a per
share intrinsic value to be $191.75, and at this price point Martin Marietta was
undervalued by 40% in the market place. Similarly, following the assumptions and
calculations for the EBITDA, we found the per share intrinsic value for Martin Marietta
to be $188.12, and again this model put Martin Marietta’s share price of $136.58 under
the actual value. This EBITDA model forecasted the stock to be undervalued by 38%
comparably.
There is a brief test of accuracy for the valuation models, and this is by doing a
relative valuation. Relative valuation takes into account a quick expected share price
based upon multiples and earnings per share. The valuation then uses expected dividend
pay outs for the next two years and discounts them back plus the expected future price by
one plus cost of equity. This rough and tumble method gave us a per share intrinsic value
of $150.00 flat.9
VII. Conclusion
By examining all three of the valuation models we would be able to establish that
Martin Marietta’s stock price at December 31, 2015 was undervalued. Although these
models are commonly used, there is still a lot that can go wrong and lead to an incorrect
valuation. For example the models in theory are all based upon the same numbers and
should lead to the same valuation for intrinsic value. However, since there are
9
Analyst Note: This relative valuation model is the least preferred method, since it only takes
short term values into account and disregards the operational and financial assumptions for the
future.

26
simplifications, assumptions, and interpretations of the data the models all lead to
different values.
Ultimately, profitable investments in the very efficient market that we live in
require time and detailed analysis. These models are useful for analysts to create general
guidelines for stock prices and the value of firms.
Concluding this paper, the analyst responsible believes that the firm has upward
mobility and growth potential, even despite the uncertainty of the models and the values
they create. The current stock price is undervalued for the intrinsic value of future cash
flows, and it is recommended that we hold our current position in Martin Marietta until
the stock reaches $300 per share.10
10
Analyst’s Note: considering the valuation for Martin Marietta occurred 2011-2015, it is near the
end of 2016 and we have seen how the stock has reacted since the given time from. Currently
MLM is trading at $229.85 a share and that our valuation models were correct in assuming the
company was undervalued.

27
VIII.References
Chen, K. C., & Jassim, A. (2014). Pedagogical-cum-Analytical Tool for Teaching Business
Valuation. Journal of Financial Management and Analysis, 26(2),
CSIMarket. (2016). Construction Raw Materials Industry Data,. Retrieved November 2016, from
CSIMarket.com, http://csimarket.com/Industry/Industry_Data.php?ind=112
Fernandez, P., Ortiz, A., & Acin, I. (2015). Discount Rate (Risk-Free Rate and Market Risk
Premium) used for 41 countries in 2015: a survey. IESE Business School
Fiore, A. (2013) CFA Institute Industry Guides – The Machinery Industry. Charlottesville. CFA
Institute.
Investopedia.com. (2005, May 23). Common size financial statement. Retrieved 2016, from
Investopedia, http://www.investopedia.com/terms/c/commonsizefinancialstatement.asp?lgl=no-
infinite
Koller, Tim, Marc H. Goedhart, David Wessels. Valuation:
Measuring and Managing the Value of Companies. Hoboken, NJ: John Wiley &
Sons, 2010. Print.
Martin Marietta Delivers Record Q3 Performance. (2016, November 01). Retrieved November
28, 2016, from Martin Marietta,
http://ir.martinmarietta.com/releasedetail.cfm?ReleaseID=996606
Martin Marietta (2016). Martin Marietta- About US. Retrieved November 2016, from Martin
Marietta, https://www.martinmarietta.com/about-us/company-history/
Value Line. (2016). Value Line- Martin Marietta Materials.
United States Treasury. Treasury.Gov. Retrieved November 2016, from United State’s Treasury,
https://www.treasury.gov/resource-center/data-chart-center/interest-
rates/Pages/TextView.aspx?data=yieldYear&year=2016

28
IX. Appendices
Table1.0MLMIncomeStatement(Common-Sized)

29
Table2.0MLMBalanceSheet(Common-Sized)

30
Table3.0StatementofCashflows

31
Table 4.0 Financial Statement Key Metrics
Table 5.0 Historical NOPLAT

32
Table 6.0 Historical Invested Capital
Table 7.0 Historical ROIC/Key Metrics

33
Table 8.0 Historical Free Cash Flows

34
Table 9.0 MLM Stock Returns vs. Market Returns (Graphed Relationship)
Month MLM Market R(stock) R(market)
12/1/2010 92.239998 1257.64
1/3/2011 83.500000 1286.12 -‐9.48% 2.26%
2/1/2011 88.860001 1327.22 6.42% 3.20%
3/1/2011 89.669998 1325.83 0.91% -‐0.10%
4/1/2011 91.190002 1363.61 1.70% 2.85%
5/2/2011 85.660004 1345.2 -‐6.06% -‐1.35%
6/1/2011 79.970001 1320.64 -‐6.64% -‐1.83%
7/1/2011 75.620003 1292.28 -‐5.44% -‐2.15%
8/1/2011 70.830002 1218.89 -‐6.33% -‐5.68%
9/1/2011 63.220001 1131.42 -‐10.74% -‐7.18%
10/3/2011 72.169998 1253.3 14.16% 10.77%
11/1/2011 78.260002 1246.96 8.44% -‐0.51%
12/1/2011 75.410004 1257.6 -‐3.64% 0.85%
1/3/2012 82.510002 1312.41 9.42% 4.36%
2/1/2012 85.870003 1365.6801 4.07% 4.06%
3/1/2012 85.629997 1408.47 -‐0.28% 3.13%
4/2/2012 82.879997 1397.91 -‐3.21% -‐0.75%
5/1/2012 67.470001 1310.33 -‐18.59% -‐6.27%
6/1/2012 78.820000 1362.16 16.82% 3.96%
7/2/2012 75.139999 1379.3199 -‐4.67% 1.26%
8/1/2012 76.379997 1406.58 1.65% 1.98%
9/4/2012 82.870003 1440.67 8.50% 2.42%
10/1/2012 82.309998 1412.16 -‐0.68% -‐1.98%
11/1/2012 90.0000000 1416.1801 9.34% 0.28%
12/3/2012 94.279999 1426.1899 4.76% 0.71%
1/2/2013 98.730003 1498.11 4.72% 5.04%
2/1/2013 97.129997 1514.6801 -‐1.62% 1.11%
3/1/2013 102.019997 1569.1899 5.03% 3.60%
4/1/2013 100.989998 1597.5699 -‐1.01% 1.81%
5/1/2013 109.029999 1630.74 7.96% 2.08%
6/3/2013 98.419998 1606.28 -‐9.73% -‐1.50%
7/1/2013 99.599998 1685.73 1.20% 4.95%
8/1/2013 96.050003 1632.97 -‐3.56% -‐3.13%
9/3/2013 98.169998 1681.55 2.21% 2.97%
10/1/2013 98.089996 1756.54 -‐0.08% 4.46%
11/1/2013 96.559998 1805.8101 -‐1.56% 2.80%
12/2/2013 99.940002 1848.36 3.50% 2.36%
1/2/2014 109.010002 1782.59 9.08% -‐3.56%
2/3/2014 121.980003 1859.45 11.90% 4.31%
3/3/2014 128.350006 1872.34 5.22% 0.69%
4/1/2014 124.330002 1883.95 -‐3.13% 0.62%
5/1/2014 122.800003 1923.5699 -‐1.23% 2.10%
6/2/2014 132.050003 1960.23 7.53% 1.91%
7/1/2014 124.230003 1930.67 -‐5.92% -‐1.51%
8/1/2014 130.960007 2003.37 5.42% 3.77%
9/2/2014 128.940002 1972.29 -‐1.54% -‐1.55%
10/1/2014 116.919998 2018.05 -‐9.32% 2.32%
11/3/2014 120.040001 2067.5601 2.67% 2.45%
12/1/2014 110.32 2058.8999 -‐8.10% -‐0.42%
1/2/2015 107.739998 1994.99 -‐2.34% -‐3.10%
2/2/2015 142.330002 2104.5 32.11% 5.49%
3/2/2015 139.800003 2067.8899 -‐1.78% -‐1.74%
4/1/2015 142.649994 2085.51 2.04% 0.85%
5/1/2015 149.009995 2107.3899 4.46% 1.05%
6/1/2015 141.509995 2063.1101 -‐5.03% -‐2.10%
7/1/2015 156.820007 2103.8401 10.82% 1.97%
8/3/2015 167.800003 1972.1801 7.00% -‐6.26%
9/1/2015 151.949997 1920.03 -‐9.45% -‐2.64%
10/1/2015 155.149994 2079.3601 2.11% 8.30%
11/2/2015 157.399994 2080.4099 1.45% 0.05%
12/1/2015 136.580002 2043.9399 -‐13.23% -‐1.75%
Std Dev. 28.145% 11.698% Annualized
8.125% 3.377% Non Annualized
Martin Marietta Beta Analysis

35
Table 9.1 Regression Analysis (Raw Beta, Adjusted Beta, Levered Up Industry Beta,
Debt-to-equity Ratio)

36
Table10.0PanelA,OperatingAssumptions

37
Table 11.0 Panel B (Inputs for Present Value Calculations)
Table 12.0 Panel C (Valuation Calculations)
Table 13.0 Relative Valuation

38
Table 14.0 Sensitivity Analysis

Martin Marietta Corp. (MLM) Stock Valuation Report

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