We closed this position on February 26, 2016. A copy of the associated Position Update report is here.

Vulcan Materials Co. (VMC) is one of September’s Most Dan­ger­ous Stocks. Free copy of report is here: VMC. And like all of our Most Dan­ger­ous Stocks the company has:

  1. Mis­lead­ing earn­ings = account­ing prof­its are pos­i­tive and ris­ing while true, eco­nomic prof­its are neg­a­tive and falling
  2. High Val­u­a­tion = very high expec­ta­tions embed­ded in the cur­rent valuation.


  1. Mis­lead­ing Earn­ings: VMC reported a $34mm increase in GAAP earn­ings while our model shows eco­nomic earn­ings declined by $218mm. The main dri­vers of the dif­fer­ence between Eco­nomic ver­sus Account­ing earn­ings are VMC’s’s (a) $261mm in asset write-offs — 4% of Net Assets and (b) $887mm of deferrred tax liabilities — 12% of Net Assets.
  2. Very Dangerous Valuation: Stock price of $36.89 implies VMC must grow its NOPAT at 12% com­pounded annu­ally for 40 years. A 40-year Growth Appre­ci­a­tion Period with a 12% com­pound­ing growth rate is quite a high stan­dard to beat, as per my post on How To Make Money Pick­ing Stocks.
  3. Under­funded Pen­sions of $334mm (7% of mar­ket value)
  4. Stock option liabilities of $22mm (0.5% of mar­ket value)

Over­all, the Risk/Reward of invest­ing in VMC’s stock looks Very Dan­ger­ous to me. There is lots of down­side risk given the Mis­lead­ing Earn­ings and there is lit­tle upside reward given the already-rich expec­ta­tions embed­ded in the stock price.

See Appen­dix 4 to learn how VMC NOPAT plum­meted even though Net Income rose in its last fis­cal year based on a big decrease in non-operating expenses ver­sus the prior year. See Appen­dix 5 for details on VMC’s Invested Cap­i­tal. Appen­dix 7 (in the Return on Invested Cap­i­tal sec­tion) shows how the falling NOPAT Mar­gin and Invested Cap­i­tal Turns result in a decrease in ROIC (to 0.9% from 3.4%) and Eco­nomic Profit, which fell by $218mm while Net Income rose by $34.4mm.

As per Invest­ment Strat­egy 101 and How to make money pick­ing stocks, VMC fits the pro­file of a great stock to short or sell.

See Finance 101 and Eco­nomic Ver­sus Account­ing Prof­its for more detail on why account­ing prof­its are not reli­able indi­ca­tors of cor­po­rate prof­itabil­ity or value creation.

Note: Stock pick of the week is updated every Tuesday.

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