Flooding may impact stone producers

Longbow Research mining and construction-materials analyst David MacGregor lowered his earnings estimates on Martin Marietta Materials and Vulcan Materials. Mr. MacGregor observed, “Both have significant operations near [midwestern] rivers, with most of VMC’s footprint in the Lower Mississippi region. MLM’s footprint near potential flood sites in Iowa is particularly concerning. While VMC appears to have significantly fewer quarries directly impacted by the flooding than MLM, we anticipate potential freight bottlenecks down the Mississippi will have a negative impact on VMC’s distribution network.”

Vulcan Materials Co.: Reducing Estimates on Weather and Flood Concerns

• We are reducing our estimates for VMC to account for inclement weather and flooding in the Midwest.
• While VMC has minimal operations in the region – mainly limited to southern Wisconsin and Chicago – we anticipate transportation bottlenecks could impact rail and barge transport downstream near the Gulf States.
• We are revising our below consensus estimates to $1.13 (-$0.04) for 2Q08 and $3.46 (-$0.06) for FY08. Our FY09E remains at $4.60.
• We continue to rate VMC a BUY with a $98 price target on a favorable view of VMC’s leading position in the aggregates industry, one which we continue to believe will enjoy attractive fundamentals going forward – particularly in key markets of California and Florida.

Martin Marietta Materials: Reducing Estimates on Weather and Flood Concerns

• We are revising our 2Q08 Street-low estimates to $1.78 (-$0.15) and to $6.25 (-$0.20) for FY08. Our FY09 EPS estimate remains at $7.10. We are concerned about the near-term impact of flooding and wet weather during the quarter in a number of MLM's Midwestern markets.
• Our channel checks in Iowa indicated a number of aggregates operators without power for over a week. While MLM’s extensive network throughout the state will afford the Company opportunities to shift production to non-impacted facilities, increased transportation bottlenecks should increase freight costs. We note that major bottlenecks typically disrupt the entire rail network and estimate, based upon reports from various railroads, that roughly 20 percent of the rail network could experience delays.
• We estimate approximately 12-14 percent of MLM’s shipments come from Iowa, Wisconsin and Indiana. While not all facilities are currently at risk for flood-related closures, we anticipate the near-term impact could extend to rail and barge bottlenecks which could then impact operations along MLM’s long-haul distribution network.
• In the long term, MLM could benefit from a recovery in operations caused by the flooding. MLM is the largest producer of railroad ballast in the country, and 10 percent of the company’s business serves nontraditional markets such as ballast and agricultural lime for the Farm Belt. Together with levee reconstruction and the rebuilding of homes and businesses, MLM is well situated to participate in recovery efforts, although the timing and potential positive at this point is unclear.
• While we like the long-term earnings power associated with attractive industry fundamentals and the company's capacity expansion initiatives, near-term concerns regarding FY08-FY09 demand and rising energy costs continue to weigh on our opinion. As a result, we remain neutral on MLM. Your comment?