FOOL ON THE HILL
An Investment Opinion
Investing In Rocks Bill Mann (TMF Otter)
January 19, 2000
Not very long ago, I had a conversation with my dad, who had recently made a few stock purchases. His philosophy runs fairly closely to mine: a combination of a rock-solid portfolio base mixed in with a few more aggressive companies, mostly in telecommunications and telecom equipment -- an area that we both know something about.
So imagine my surprise when my father told me that he was considering purchasing stock in Martin Marietta (NYSE: MLM). First, of course, I thought he was bananas because the company that I knew as Martin Marietta merged a few years ago with Lockheed to form Lockheed Martin (NYSE: LMT).
"Nope, this is Martin Marietta -- it's a different company, it's based in Raleigh (where I grew up), and it's in aggregates."
"Oh, an aggregator," said Bill Mann fils. "What do they aggregate?"
"No, they're into aggregates. Rocks and gravel," my father, who has a lightning quick mind and the patience of Job, explained to his skeptical son.
Then I understood what he was talking about, but I couldn't believe it. With all of the amazing companies, technological and otherwise, why would he invest in an aggregate company? I mean, talk about the ultimate commodity -- you can get rocks anywhere. What an aggregator does is crush quarried rocks down to a proper size for use in whatever industrial application they will be needed for. Not very sexy, huh?
Then my dad told me something that was VERY intriguing. Actually, a few things. First was that the federal and North Carolina governments have allocated billions of dollars for reconstruction from the damage caused by Hurricane Floyd, including all manners of reconstruction, this on top of the reconstruction obligations the super catastrophe insurance companies will have to foot the bill for. And every single one of these sites, in the massive construction zone that is Eastern North Carolina, will require aggregate. Aggregate for cement, asphalt, foundations, sidewalks, bridges, you name it. And Martin Marietta is the largest provider in the area.
There's nothing like a little guaranteed business to pique one's interest. So then my dad hit me with a double whammy that told me two things: 1) I may have gravely underestimated his mental capacity during my teen years, and 2) the man had done his research. It was this: The federal and state governments are itching to spend some of their budget windfalls on public works projects. So in 1998, President Clinton signed the Transportation Equity Act of the 21st Century (TEA21), allocating $217 billion on highway spending over the next six years. Then yesterday, The Washington Post reported that the states of Maryland and Virginia (both big markets for Martin Marietta) are each going to spend in excess of $2.5 billion building out their road systems.
And thus it hit me, gaping at yesterday's paper, that my dad had truly studied a market, seen a need, and anticipated it with his investment dollars. How very Foolish! In farmers' parlance, he is choosing not to drink downstream from the herd. In an age when every single investor, it seems, counts upon the safety of crowds in a relatively low number of companies, he went out and did due diligence (both on the specific company and its potential market), sought out opportunities, found one, and jumped on it. And from what I garner from the company's financials, on top of what I know about the growth potential for its market, he's going to do well with this.
Martin Marietta Materials is a $2 billion company with a run rate for sales in excess of $1 billion, an increase of 19% from the year prior. Net profits for the company for the first nine months of 1999 are nearly 17%, an exceptionally high number for a commodity industry. The key thing to note about these numbers is that both are from last year, in advance of Hurricane Floyd (which actually hurt 2Q earnings and profits by flooding many Martin Marietta quarries), in advance of the majority of funding for the TEA21. Add in the announcements of new spending being done by Virginia, Maryland, and other states. The largest potential growth factors at Martin Marietta were not represented in the previous year's numbers.
This is not a company without some issues, however. The company financials betray a few potential bugaboos -- most notably the decrease in net margin by 2% from the previous year, and the level of cash on hand at the company is a paltry $600,000, less than one day's worth of operating expenses. Also of concern is the high level of receivables, consistently at about 60% of quarterly revenues. This means that on average, each dollar that Martin Marietta earns from operations takes more than 56 days to be received by the company. A cursory look at other companies in the industry tells us that this is not uncommon, but since they are competing with every other public company for our investment dollars, the company would be well served by improving its cash management.
Martin Marietta's inventories are also quite high, in excess of 50% of quarterly revenues, though this has more to do with the nature of the business and demand cycles than poor management. After all, it is fairly difficult to imagine rock becoming obsolete, and although processing raw material into aggregate is energy-intensive and technical, the end product doesn't exactly jump into one's mind when someone says "high tech." "Dumb as a box of rocks," maybe.
Martin Marietta stock has increased in value from under $17 in 1996 to around $46 today, an increase of 200% (dividends reinvested), or 23% Compound Average Growth Rate (CAGR). This is nothing to sneeze at, again keeping in mind that we're talking about a commodity manufacturer. But the real story here is the strong potential for growth in its market, courtesy of the budget surplus being enjoyed now by many jurisdictions around the country, including the federal government. For as long as it lasts, and for as long as the road, bridge, rail, and other types of infrastructure projects are being thrown up everywhere in its service area, Martin Marietta looks to be one of the companies that benefits from the largess of our tax dollars at work.
I could close this with something punny like telling my dad to "Rock on," but I'll just congratulate him on his due diligence skills and hope that he will be amply rewarded for investing in a good company for the right reasons.
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