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www.jpmorganmarkets.com

North America Equity Research

21 March 2019

Equity Ratings and Price Targets

Mkt Cap

Rating

Price Target

Company

Ticker

($ mn)

Price

($)

Cur

End

Date

End

Date

Vulcan Materials

VMC US

15,233.12

115.35

—

135.00

Dec

— —

Martin Marietta Materials

MLM US

12,324.46

195.76

—

225.00

Dec

— —

Eagle Materials

EXP US

3,321.16

71.77

—

85.00

Dec

— —

Summit Materials

SUM US

1,964.60

17.07

—

19.00

Dec

— —

Source: Company data, Bloomberg, J.P. Morgan estimates. n/c = no change.All prices as of 20 Mar 19.

US Construction Materials

Initiating Coverage of VMC and MLM with OW on

larger Aggregates exposure; EXP and SUM at N

Americas Construction Materials

Adrian E Huerta

AC*

(52-81) 8152-8720

adrian.huerta@jpmorgan.com

Bloomberg JPMA HUERTA <GO>

Froylan Mendez

(52-55) 5540-9482

froylan.mendez@jpmchase.com

J.P. Morgan Casa de Bolsa, S.A. de C.V.,

J.P. Morgan Grupo Financiero

* Registered/qualified as a research analyst under NYSE/FINRA rules.

See page 237 for analyst certification and important disclosures, including non-US analyst disclosures.

J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aw

are that

the firm may have a conflict o

f interest that could affect the objectivity of this report. Investors should consider this report as only a single

factor in making their investment decision.

We are initiating coverage of the US Construction Materials sector with OW

ratings on VMC and MLM as we like their large aggregates exposure that is more

exposed to infra spending, which is growing more than Res and Non-Res. They

are also more exposed than peers to states with stronger growth fundamentals. We

are also initiating coverage of EXP and SUM with N ratings as they have lower

growth profiles. The sector has performed well this year at +17% on average

(+4pp vs SPX and +5pp vs US MSCI Materials), excluding SUM, which is +42%

and is trading at its average historical EV/EBITDA. This report includes extensive

analysis on prices, volumes, costs and margins but also on market share evolution,

analysis on a per state basis and detailed views on the Residential, Non-Res and

Infra sectors.

Bottom-up views

 We see prices and volumes accelerating this year. On aggregates volumes,

while last year our sample grew 3.1% (same as for the industry), for this year we

see it growing 4.9%, outpacing the industry’s expected growth of 2.4%. For

cement vols, last year our sample also performed weaker than the industry at

+1.4%, impacted by adverse weather especially in TX, vs +2.2% for the industry

while for this year we expect it to be 0.5pp above the industry’s +2.2%. On

prices, aggregates were +2.8% last year (below the +4% for the industry), and

we expect +4.8% for this year, and on cement we expect +2.9% this year vs

+2% last year, which was only 0.3pp below the industry.

 Margins should improve this year after disappointing in the past two.

Higher energy and distribution costs have impacted margins with EBITDA

margins -1pp in 2018 and in 2017 after posting +2.7pp in 2016, and we expect

consolidated margins to be +1.2pp this year mainly driven by stronger pricing

momentum and lower increases in cash costs (JPM cement energy cost inflation

index could be flattish this year if it remains at current levels as of Feb 2019)

than last year.

 We expect stronger EBITDA growth vs last year and led by VMC. EBITDA

growth for the sector has decelerated in the past two years. After increasing 18%

in 2016, it went to +8% in 2017 and only +3% last year, but we expect this year

to be +11%, which means a small margin expansion. We expect VMC and

MLM to lead the growth again.

North America

Equity

Research

21 March 2019

Adrian E Huerta

(52-81) 8152-8720

adrian.huerta@jpmorgan.com

 FCF conversion rate expected to improve further this year. Last year the

conversion rate was 36% on average vs 29% in 2017, and we expect it to be 41%

for this year. Last year, VMC’s and MLM’s rates increased by 26pp and 18pp,

respectively, reaching 44%, while the rate was flat for EXP and -13pp for SUM.

Top-down views

 Top-down views favor VMC and MLM. VMC is highly exposed to our product,

geographic and end-market preferences in the US followed by MLM among pure

US players. Meanwhile, geographic footprints for CX and Argos are the highest

with Tier 1 States while GCC follows VMC with the highest exposure to the

infra/public sector.

 We like aggregates over cement and RM for the following reasons: (1) Stronger

LT growth prospects as aggregates players are more exposed to the public sector.

In the last 3 quarters, aggregates volumes were growing 2pp above the growth in

cement vols. (2) More inelastic demand with prices +4% in a 7-year CAGR vs +1%

for volumes, while for cement +4% on prices vs +4.5% on volumes. And (3) higher

margins and operating leverage, on the cost side less exposed to energy prices and

a higher percentage of fix costs driving a 50-60% operating leverage.

 Infra (public) sector growth accelerating and has outperformed the rest. After

several years of declines, it was +7% in 2018, and we expect it to grow 3/3.5%

driven mainly by efforts from state and local governments to increase infra

funding. We believe that chances are high for a formal discussion on a new

infrastructure plan to be finally addressed. Our base-case scenario is not based on

the approval of a new infrastructure plan but assumes positive momentum from

project backlog.

 Demand from the housing sector has likely reached a peak but likely still

growing at a low-single-digit pace for the next couple of years while the recent

slowdown has mostly been explained by higher interest rates, but there are

downside risks. Cement is more exposed to Res than agg. Non-residential sector

should keep slowing down in 2019 driven by key cement/aggregates intensive

segments, and we see no clear inflection point yet despite Jan’s m/m gains and

we believe y/y growth could remain in the +2-3% range vs +5% last year.

 Strong demand in the US “Sunbelt” region with key cement & aggregates

consuming states expected to see +40% population growth by 2040 (~2% per year)

and with cement and aggregates demand still below peak levels. CX, Argos, and

MLM are exposed to the most attractive geographical regions among US-exposed

players given a large exposure to what we classify as tier 1 states (California,

Florida, and Texas).

North America

Equity Research

21 March 2019

Adrian E Huerta

(52-81) 8152-8720

adrian.huerta@jpmorgan.com

Table of Contents

Executive Summary ...............................................................................................................6

Bottom-up views ...............................................................................................................................................................7

Top-down views................................................................................................................................................................8

Sector Risks......................................................................................................................................................................9

Key Themes..........................................................................................................................11

Top-down views favor VLM and MLM...........................................................................................................................11

We like aggregates over cement and RM .........................................................................................................................12

Geographic exposure is important; CX, Argos, MLM and VMC more exposed to Tier 1 states.........................................13

Infra could surprise positively, and downside risks limited...............................................................................................15

Margins should improve this year after disappointing in past two years . . . ......................................................................19

. . . driving stronger EBITDA growth vs last year and led by VMC ..................................................................................22

Volumes, larger LT upside on aggregates ........................................................................................................................24

Aggregates prices grow more consistently than cement....................................................................................................27

EXP generates the highest ROIC, explained by its wallboard business, but is declining while for the rest increasing . . . ...30

Growth capex and acquisitions; VMC’s investment yields are 2-3x more than peers’ .......................................................30

Return of cash through buybacks should continue............................................................................................................32

FCF conversion rate expected to improve further this year ...............................................................................................33

Favor Aggregates over Cement and RM ............................................................................37

Aggregates more exposed to Public Construction, our favored end market .......................................................................39

Demand is highly correlated among Cement and Aggregates and both below peak levels .................................................40

Similar pricing trends for Agg and Cement but more defensive for Agg, which allows for higher margins ........................41

Aggregates could grow stronger than Cement as most players at full capacity and imports will play a role........................44

Cement imports’ profitability dependent on four items.....................................................................................................45

Energy costs: RM/Aggregates less exposed to fuel volatility than Cement but key inputs have started to decline...............49

Aggregates have high entry barriers.................................................................................................................................54

The 2020 IMO regulation could drive lower cash cement costs while pushing higher imported cement costs ....................57

What are Aggregates, cement and RM? ...........................................................................................................................61

Residential growth slowing after a long recovery... CX, EAG & SUM most exposed ....63

Housing sentiment recovering after a weak 2H18, but not yet shown in permits ...............................................................65

EXP, CX and MLM have the largest exposure to states with housing permits above the national average .........................68

Household formation has been gaining momentum ..........................................................................................................69

Housing inventory well below historical average at ~1.8mn .............................................................................................71

Strong affordability compensates higher mortgage rates...................................................................................................71

Home improvement as a share of consumers’ wallet has been recovering.........................................................................76

Infra starting to recover despite lack of plan… Vulcan, GCC & MLM most exposed.....79

Strong momentum led by aggregates & cement intensive segments within public construction spending...........................80

Vulcan, MLM and GCC with the largest exposure to infrastructure..................................................................................81

Public spending with large room to grow . . . ...................................................................................................................81

. . . and is recovering .......................................................................................................................................................85

Recovery driven by state & local gov’t investments . . . ...................................................................................................88

. . . by solving their infrastructure deficit on their own......................................................................................................90

Federal government programs .........................................................................................................................................93

North America

Equity

Research

21 March 2019

Adrian E Huerta

(52-81) 8152-8720

adrian.huerta@jpmorgan.com

Non-residential to keep slowing down in 2019… SUM & MLM the most exposed ........98

All states are different .......................................................................................................105

Demand in most states below peak levels, but “Sunbelt” region with most promising outlook and momentum................105

Mid-term demand outlook favors Sunbelt region............................................................................................................108

Among pure US players: Key exposure to CA and TX drives outperformance in Vulcan and MLM regions vs. the US...110

Valuation.............................................................................................................................118

Summit most shorted name............................................................................................................................................124

Cyclical stocks within a cyclical sector... but some more than others; SUM/EXP are more cyclical than VMC/MLM......125

Vulcan Materials.................................................................................................................128

Well positioned to continue growing EBITDA above peers that warrants its premium valuation; Initiate at OW ............. 128

Investment Thesis .........................................................................................................................................................128

Risks to Rating and Price Target....................................................................................................................................129

Highest exposure to aggregates among peers …............................................................................................................. 130

… while infrastructure sector is its largest end market....................................................................................................130

Key exposure to California, Texas and Georgia where it has integrated RM and Asphalt operations ...............................131

EBITDA growth above peers . . ....................................................................................................................................132

. . . driven by top line but also from margin expansion ...................................................................................................132

Unit profitability on Agg is the highest among peers......................................................................................................134

FCF generation is strong at 37% of EBITDA . . . ...........................................................................................................135

. . . and has large cash returns to shareholders ................................................................................................................136

Disciplined Leverage at only 2x.....................................................................................................................................137

Vulcan businesses .........................................................................................................................................................137

Martin Marietta ...................................................................................................................143

Best geographic mix with room to surprise on market share recovering and pricing; Initiate at OW ................................143

Investment Thesis .........................................................................................................................................................143

Risks to Rating and Price Target....................................................................................................................................144

EBITDA growth at +11% this year . . . ..........................................................................................................................145

. . . driven by higher margins . . .....................................................................................................................................145

. . . and with cement vols +2% and aggregates +6% .......................................................................................................146

Aggregates per ton gross profit +72% (2017 vs 2014) but down last year .......................................................................146

Strong FCF generation reaching 44% of EBITDA in 2018 .............................................................................................149

Large cash returns to shareholders ................................................................................................................................. 149

With room to continue doing M&A ...............................................................................................................................150

A leading aggregates-led company in the US . . . ...........................................................................................................152

. . . looking to grow further in cement . . ........................................................................................................................153

Top 5 markets make 70% of sales with 38% coming from TX........................................................................................153

MLM businesses ...........................................................................................................................................................154

Eagle Materials...................................................................................................................162

Low leverage, ample cash returned to shareholders but limited growth potential; Initiate at N.........................................162

Investment Thesis .........................................................................................................................................................162

Risks to Rating and Price Target....................................................................................................................................163

EXP’s capital structure a strategic positive.....................................................................................................................164

Lean management focused on ROE ...............................................................................................................................165

EBITDA growth has been relatively flat in past two years excluding acquisitions. . . ......................................................166

North America

Equity Research

21 March 2019

Adrian E Huerta

(52-81) 8152-8720

adrian.huerta@jpmorgan.com

Cement accounts for 45% of EBITDA . . . .....................................................................................................................167

. . . & wallboard for 40% ...............................................................................................................................................169

Oil & Gas business with large upside but could take time...............................................................................................171

EXP businesses .............................................................................................................................................................172

Summit Materials ...............................................................................................................181

Building an empire has its costs; Initiate at N on high leverage.......................................................................................181

Investment Thesis .........................................................................................................................................................181

Risks to Rating and Price Target.................................................................................................................................... 182

Growth has come from large M&A investments.............................................................................................................183

But should not do acquisitions yet given high leverage. . ...............................................................................................183

. . . and a low value share price ......................................................................................................................................184

Aggregates is 36% of gross profits….............................................................................................................................184

… with large exposure to Texas, Utah, Kansas and Missouri.........................................................................................185

FCF should improve on lower capex and EBITDA growth.............................................................................................189

2018 was weak with EBITDA -7% despite acquisitions. . ..............................................................................................190

. . . but guiding for 6-16% EBITDA growth this year .....................................................................................................191

Summit businesses ........................................................................................................................................................192

Appendix – State details....................................................................................................199

Vulcan Materials.................................................................................................................225

Martin Marietta Materials ...................................................................................................228

Eagle Materials...................................................................................................................231

Summit Materials ...............................................................................................................234

We acknowledge the key contribution to this report from Emilio Bailon of Banco J.P

Morgan S.A.