Gravel Stock Costs Half

 

Location, they say, is everything, and gravel maker CRH would certainly agree. Its coming move from Europe to the U.S. could be just what its stock needs to drive further upside.

Dublin-based CRH (ticker: CRH) is one of the largest building-materials companies in the world. It produces aggregates, the rocks used to make concrete, as well as cement, asphalt, and other construction-related products that it sells in Europe and the U.S. It also builds roads. It’s a good business—and likely to get a boost in the U.S. from recent federal legislation.

Some optimism is starting to be reflected in its shares. CRH’s American depositary receipts have gained 23% over the past 12 months. Despite that impressive gain, CRH trades at a deep discount to its U.S.-traded peers. Martin Marietta Materials (MLM) and Vulcan Materials (VMC), at 22 and 25 times estimated 2024 earnings, respectively, fetch at least twice the valuation as CRH’s 11 times, despite a growth outlook that looks fairly similar. Moving the stock should make acquisitions easier, lift its profile with U.S. investors, and help close the valuation gap—something that will give shares a boost in the year ahead.

For a European company, it’s pretty American. It’s the third-largest producer of construction aggregates in the U.S. behind Vulcan, the market leader with less than 10% total market share, and Martin Marietta. CRH’s U.S. businesses, based in Atlanta, account for roughly 60% of sales and nearly three-quarters of total operating profit.

It’s a solid business. Rocks don’t travel well. It might make sense to drill oil in Texas and ship it to other states via rail or pipeline, but it makes far less sense—and would be very pricey—to ship rocks hundreds of miles away. There are usually just one or two quarries that service any area, giving companies a strong market share where they operate.

The aggregate industry is also fragmented, with the top 10 producers accounting for just a third of U.S. annual output. Larger players can make acquisitions that boost profits and consolidate the competition. CRH has spent some $10 billion on mergers and acquisitions in the past five years. That growth didn’t stop it from spending $4 billion on stock repurchases and paying $4 billion in dividends.

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A good business is about to get better. Thanks to government programs like the Infrastructure Investment and Jobs Act, the Inflation Reduction Act, and the Chips Act, nearly $2 trillion in spending on everything from battery plants for electric vehicles to semiconductor facilities will be entering the economy—and providing a nice bump to the U.S. construction business.

Some of the stimulus is already showing up in the numbers. Commercial construction activity in the U.S. in March grew by 19% from the previous year, while road construction was up more than 20%, helping to push aggregate pricing higher. “CRH is benefiting from the infrastructure programs here,” Morgan Stanley’s Andrew Slimmon told Barron’s last week, while adding that the stock’s low multiple frustrates management.

If all goes well, CRH’s listing on the New York Stock Exchange should help close the valuation gap, and it’s putting the decision to a vote at an extraordinary general meeting on June 8. It won’t be an immediate fix. UBS analyst Gregor Kuglitsch notes that the relisting could force funds that track European benchmarks to sell the stock almost immediately, while it will take time for CRH to be added to U.S. indexes. But a U.S. listing should make it easier for CRH to buy companies with stock and to benefit from rules that favor American companies, Kuglitsch says. His price target works out to about $61 a share, up almost 25% from the ADR’s Wednesday close of $49.68.

The move will offer other advantages. It will help raise the company’s profile with U.S. institutional investors, as only one of the 10 analysts with the highest price targets for CRH covers Vulcan and Martin Marietta. It will also change how CRH reports its results, making them easier to compare with those of its two American competitors.

And that should, ultimately, earn it a similar valuation. Their businesses aren’t all that different, after all. Vulcan and Martin have grown earnings at about 16% and 11% a year on average for the past five years, respectively. CRH has grown earnings at about 15% a year on average. Looking ahead, Vulcan and Martin are expected to increase earnings at about 16% and 19% for the coming two years, reflecting improvement in the underlying business. CRH is expected to increase earnings at about 12% a year on average, deserving of a market multiple of at least about 17.5 times. At that valuation, the stock would be worth about $75 a share, up 50% from recent levels.