‎

By Zacks Equity Research

We recently upgraded our rating on construction materials producer Vulcan Materials (VMC) from "neutral" to "outperform" as it stands to benefit largely from a recovering housing market.

With a gradual recovery in the overall economy, the homebuilding industry is finally seeing signs of stabilization in 2012. The downturn during 2006-2007 had hurt the homebuilding sector hard. We believe that the housing market is starting to benefit from an increase in employment rates and higher consumer confidence. Houses are more affordable now as mortgage loans come with relatively low interest rates, while renting becomes more expensive. As the new home construction market started recovering, the demand for Vulcan's products has also gone up.

Further, we are encouraged by the company's better-than-forecast​ first half results, in particular the impressive performance at the aggregates segment, which is slowly gaining momentum.

Vulcan is the largest producer of construction aggregates in the U.S. The aggregates business, which accounts for the lion's share of the company's revenue, is slowly gaining momentum along with signs of recovery in the in the U.S. construction sector. The segment is witnessing consistent volume growth driven by improving demand.

The segment's net sales increased $73 million and gross profit was up $53 million in the trailing six months ended March 31, 2012 versus the prior-year period. Management also projects much-improved earnings in this segment in 2012.

We also like the company's strong market standing, steady volume growth and expanded cost initiatives. Demand for public construction projects, which account for more than half of the company's revenues, remains strong. Moreover, the private sector, which until now was considered fragile, is slowly recovering.

It is worthwhile to note that rival Martin Marietta Materials' (MLM) attempt to take over Vulcan has almost fallen apart. In a hostile move, in December 2011, Martin Marietta proposed to purchase all outstanding shares of Vulcan at a fixed exchange ratio of 0.50 shares of Martin Marietta common stock for each Vulcan common share. Vulcan management found the offer grossly inadequate. A court's recent ruling restricts Martin Marietta by at least four months to take over Vulcan. The order removes a significant overhang for Vulcan, at least for some time to come. 

Had Martin Marietta succeeded in its attempts, it would have attempted to nominate four directors at the upcoming Vulcan annual meeting in June this year. However, with the takeover denied, this attempt will most probably be delayed until the next annual meeting.

More from Zacks.com

• Read the full analyst report on "VMC" (registration required)
• Read the full analyst report on "MLM" (registration required)