One of my favorite books is Peter Lynch's One Up On Wall Street. In Chapter 8, Lynch describes the ideal traits he looks for when seeking out undiscovered or unappreciated companies (such as the ones featured in Motley Fool Hidden Gems). For example, you want to look for a company that "does something boring," that does it in a "no-growth industry," or that -- I love this one -- runs a "rock pit."
Well, one company that fits all of these criteria reported earnings yesterday: Vulcan Materials
Read the company's press releases, and the most exciting announcement is Tuesday's description of how Vulcan bought the assets of Columbia Rock Products. You won't be surprised to learn that Columbia also sells rocks (limestone, to be precise).
But is there enough in the financials to keep an investor awake? Unfortunately, despite Vulcan being boring enough for Lynch enthusiasts, its valuation leaves a lot to be desired.
While Vulcan's fourth-quarter earnings were up 55% over last year's Q4, and its 2003 earnings increased a respectable 14% over 2002, the rest of its numbers are unremarkable. Its enterprise value to free cash flow ratio is a staid 17. Not bad, but not great in light of analysts' projected five years average earnings growth (which I use as a proxy for FCF growth) for the company of only 9.5%.
The market as a whole has roughly the same EV/FCF/growth ratio, and is a heckuvalot more diversified than is the stock of a single company -- thus is a less "risky" investment.
On an earnings basis, Vulcan similarly fails to inspire. The company projects 2004 earnings of about $2.55 per share. At today's share price of just under $48, that yields a forward P/E ratio of about 19. Measure that against the previously mentioned 9.5% earnings growth, and you have a forward PEG of 2.0 -- or twice the ratio ordinarily considered to be "fair value."
My conclusion? As far as investment potential, Vulcan is somewhat less than rock solid.