The prices of many materials have risen sharply over the last year. The economic repercussions from the pandemic have included low inventories and disrupted supply chains. Combined with a sharp rebound in consumer demand, this has resulted in rising prices for commodities including copper and steel, and construction materials like lumber and concrete.
While that might be hurting consumers' wallets, it's pumping up profits for the companies in those industries. Some of the larger players are using their rising cash flows to buy out their peers. Leading steelmaker Nucor (NUE 0.31%) and producer of construction aggregates Vulcan Materials (VMC -1.18%) both just announced large acquisitions that will help them consolidate their industries and provide both with more opportunities for growth.
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Nucor's $1 billion cash investment
In April, Nucor announced first-quarter earnings of $942.4 million. That beat the company's previous quarterly record -- set in 2008 -- by more than $200 million. And management had enough visibility into the second quarter to provide guidance that it expects to set another earnings record in that period. Nucor is benefiting from a full order book at a time of soaring steel prices.
Futures prices for hot-rolled coil steel (a key industry benchmark) continue to hold near record highs at around $1,640 per ton -- about 225% higher than just one year ago. Strong demand that outstrips supply is supporting that pricing, particularly in the company's steel sheet business. Nucor is seeing particularly strong automotive and construction markets, but management also said it's benefiting from high demand in renewable energy, heavy equipment, and agriculture.
As of March 31, Nucor had about $3 billion in cash, cash equivalents, and short-term investments on its balance sheet. Cash from operations was strong enough in the first quarter that Nucor returned $425 million to shareholders through dividends and stock repurchases. Similar volumes of cash flow should continue as long as current business conditions prevail.
The combination of that balance sheet strength and strong cash flow put Nucor in a position to spend $1 billion in cash to add a leading metal building panel manufacturer to its portfolio.
On June 7, it announced it was acquiring the insulated metal panel (IMP) business from North America's largest manufacturer of exterior building products, Cornerstone Building Brands (CNR). The acquisition will add value to Nucor in several ways, supporting its steelmaking business and growing its offerings in expanding economic sectors.
Demand for insulated metal panels, which are used for interior and exterior wall and roofing insulation, is expanding due to the growing need for data centers, server farms, and e-commerce fulfillment warehouses. Each IMP is formed basically from a pair of metal panels with foam insulation sandwiched between them.
The newly acquired IMP unit will now be a consumer of Nucor's steel sheets, helping to bolster its order book. This should come in handy when the business cycle swings and mills are no longer overbooked. It also takes that business away from competitors.
Image source: Getty Images.
Paving its way
By coincidence, another large acquisition in the industrial and materials sector was announced on June 7. Vulcan Materials said it plans to acquire U.S. Concrete (USCR), a supplier of aggregates and ready-mixed concrete, for almost $1.3 billion. The reasoning behind the move is similar to Nucor's justification for its purchase -- the deal brings one of its major customers in-house, narrowing the competition in the sector.
During the 12-month period that ended March 31, Vulcan was able to grow its gross profits by 3.4% despite the business disruptions caused by the pandemic.
"The pricing environment remains positive, and we continue to execute at a high level, positioning us well for 2021," Vulcan Materials Chairman and CEO Tom Hill said in a statement. In 2020, the company also grew its adjusted EBITDA by 4% over 2019.
Vulcan's aggregates, asphalt, and concrete segments all performed strongly. U.S. Concrete also reported record-high revenue in the first quarter from its own aggregates products business. The company attributed that in part to an almost 9% increase in average selling prices versus the prior-year period.
These tailwinds made it a good time for Vulcan to consolidate more of that business and plan for growth. U.S Concrete is based in Texas, with 27 aggregates operations largely located in California, Texas, and the Northeast, so its assets will complement Vulcan's existing business in some areas. It will also expand Vulcan's presence in the key growth markets of Texas, New York, and New Jersey.
Looking ahead
Demand for construction materials has been strong as the economic recovery progresses, with building activity accelerating for non-residential projects like data centers and warehouses. Homebuilders are also thriving right now. The construction business will continue to be cyclical. But trends including the growth of e-commerce and energy-efficient building still look to have long runways ahead of them.
Nucor and Vulcan Materials are leaders in their sectors, and both are taking advantage of the upswing in commodity prices to grow their businesses and set themselves up for higher highs and higher lows in future business cycles.
