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Financial Analysis of Martin Marietta Materials

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Netra Shetty
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Financial Analysis of Martin Marietta Materials - February 12th, 2011

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 in applications including ceramics, paper, sugar, animal feed, and water treatment. It produces domolitic 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 and bridge decks and transportation components such as truck trailers and railroad 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. It dates its origins back to 1939, when Superior Stone, an aggregates company in Raleigh, North Carolina, was founded. The company's corporate headquarters is located in Raleigh.

Martin Marietta Materials (NYSE: MLM) is the second largest construction aggregates company in the United States by sales. Aggregates include gravel, sand, and crushed rock and are used to make building materials such as asphalt and concrete. MLM's aggregates are used in public works, residential housing, and commercial construction. Martin Marietta also sells specialty products such as magnesia-based chemicals, used in flame retardants or wastewater treatment, and dolomitic lime, used in the production of steel. The company operates primarily in the southern and western United States.

Public infrastructure projects, especially highways, provide the most demand for MLM's aggregates, taking in 48% of shipments. These public projects are less sensitive to economic factors, and give the company a degree of stability, as well as pricing power, although they do rely on timely and appropriate levels of government spending. Beginning in 2008, states around the country - including those that generate a majority of Martin Marietta's revenue - began to have budget shortfalls that affect construction on roads, highways, and other projects in which aggregates are used.[1] As long as such budget shortfalls continue, the demand for aggregates in publicly-funded projects will be negatively impacted. As such projects constitute the single largest end market for MLM, its business will suffer until these budgetary issues are resolved.

The consolidation of the aggregates industry has created an oligarchy that hands more pricing power to the companies.

Contents
1 Company Overview
1.1 Business Financials
1.2 Business Segments
1.2.1 Aggregates
1.2.2 Asphalt
1.2.3 Ready Mixed Concrete
1.2.4 Road Paving
1.2.5 Specialty Products
2 Trends & Forces
2.1 Diversifying Means of Transport Reduces Cost
2.2 As Private Construction Falters, Aggregate Demand Drops
2.3 Government Funding Shortages Delay New Construction
2.4 Energy Prices Makes Operation and Transport More Costly
2.5 Weather Conditions Can Disrupt Aggregates Operations
3 Competition
3.1 Competitors
4 References
Company Overview

Martin Marietta Materials operates primarily in the United States; it ships aggregates to 31 states, Canada, the Bahamas, and the Caribbean from 287 facilities.[2] Martin Marietta estimates that its 12.5 billion tons of reserves are sufficient for 50 years of production, although reserves vary from location to location.[3]

Martin Marietta Materials operates 197 quarries in the United States, Canada, and the Bahamas.[4] These quarries are major sources of noise and dust, and are subject to the the same "not in my back yard" mentality as nuclear power plants and garbage dumps. This makes obtaining a proper zoning permit difficult, especially near metropolitan areas where demand is highest. The company makes use of many quarries because aggregates are expensive to transport due their high weight; supplying clients more than 50 miles away is impractical.[5] Martin Marietta's access to water and rail transportation, however, makes transport over long distances cheaper and more feasible. Nonetheless, the difficulty and expense associated with long distance transport makes the aggregates market is fragmented and regional.

Business Financials
MLM earned a total of $1.7 billion in total revenues in 2009, a significant decline from its 2008 total revenues of $2.1 billion. This in turn negatively impacted its net income. As a result of the decline in revenues, MLM had its net income decline from $176 million in 2008 to $88 million in 2009.

Business Segments
MLM breaks down its business both by operating segment and by geographic segment, with Specialty Products standing alone in either case. Net sales for FY2007 are broken down by operating segment as follows:

Aggregates
This segment, which produces sand, gravel, and stone for use in construction. In 2009, this segment posted total revenues of $1.4 billion.[6]

Asphalt
This segment produces and sells asphalt.

Ready Mixed Concrete
This segment produces concrete and delivers it to companies for use in the construction of roads, highways, and other buildings.

Road Paving
The Road Paving segment paves roads, primarily in the West Group, or the Western United States.

Specialty Products
This segment produces magnesia-based chemical products, dolomitic lime, and structural composites. The chemical products are used for flame retardants, wastewater treatment, pulp and paper production, and environmental applications, while dolimitic lime is used primarily in the steel industry.


Trends & Forces

Diversifying Means of Transport Reduces Cost
As a result of consolidation and acquisitions over the past decade, Martin Marietta has gained access to various means of transport for its aggregates. As Martin Marietta continues to move more aggregates by rail and water, embedded freight costs reduce gross margins by less than if these shipments were moved by truck. The majority of the rail and water movements occur in the Southeast Group and the West Group. However, the expansion of MLM's rail-based distribution network increases its dependence on railroad performance, including track congestion, crew availability, and the ability to negotiate favorable railroad shipping contracts. Similarly, the waterborne distribution network increases MLM’s exposure to risks such as negotiating favorable shipping contracts, fuel costs, barge or ship availability, and weather disruptions.

As Private Construction Falters, Aggregate Demand Drops
Most of MLM's aggregate products are used in the construction industry, so its results depend in part on the strength of the construction industry. The housing slump since 2007 has negatively affected MLM's business as new home construction dropped, reducing the number of residential homes to be built (and supplied with aggregates). While private residential construction is a small market for MLM, the severe downturn in activity hurts business.

Government Funding Shortages Delay New Construction
The stability provided by government-funded infrastructure projects does provide insulation to a general economic downturn, but the level and timing of federal and state funding are important for maintaining 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 put hundreds of construction projects on hold due to a shortage of federal funding.[7] Indeed, publicly-funded construction around the country is dwindling due to budget shortfalls.[8] Such shortfalls, especially in MLM's top five revenue-generating states such as North and South Carolina, will put a damper on demand for aggregates.

Energy Prices Makes Operation and Transport More Costly
Martin Marietta requires a continued supply of diesel fuel, natural gas, coal, petroleum coke and other forms of energy for production. Increasing energy costs, then, negatively affect not only the production of MLM's aggregates, but also makes their transport more expensive, as mentioned above.

Weather Conditions Can Disrupt 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, while the first and fourth quarters see less activity. However, adverse weather conditions can at any time reduce demand for MLM's products, as well as increasing costs and reducing production. Business in the southeastern U.S. and the Bahamas is particularly susceptible to interruption by hurricanes and tropical storms or heavy rainfall. For instance, dry weather causes low water levels and resulted in reduced tonnage able to be shipped on a barge, while heavy rainfall and flooding in Texas, Oklahoma, and Kansas can affect shipments and operations.

Competition

Competitors
La Farge North America
Vulcan Materials Company (VMC)
Texas Industries (TXI)
Of the more than 3,800 aggregate companies in the United States, the company estimates that the five largest aggregates producers control control 31% of the market.[9]

Due to transportation costs, competition in the aggregates industry is limited by a company's proximity to its production facilities. Competition is based primarily on quarry or distribution location and price, but quality of aggregates and level of customer service are factors as well. As previously stated, MLM estimates that the largest five producers account for approximately 31% of the total market. However, Martin Marietta competes with a number of other large and small producers. Martin Marietta believes that its ability to transport materials by ocean vessels, river barges, and rail have enhanced its ability to compete in the aggregates business by lowering the per-mile cost of transport.
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