Published: August 16, 2010

Concrete and asphalt maker Vulcan Materials (NYSE: VMC) recently reported disappointing second quarter results below analysts' expectations. Higher material costs and lower product pricing negatively affected the results.

Based in part on the poor second-quarter results, S&P rating services reduced Vulcan's credit rating to "BBB-" from "BBB." S&P also forecasts the company's performance "will not match the expectations for the upcoming quarters."

The slow housing market has especially hurt Vulcan. The company's biggest markets are in Florida and California -- among the hardest hit real estate markets in the country.

But the housing slump isn't limited to the east and west coasts. From April to May 2010, new homes sales across the United States dropped a record -33%, the largest decline ever recorded. Data for June and July shows the situation is not quickly improving. And as home building declines, so do Vulcan's sales.

In an attempt to stabilize revenue, the company has been shifting from private to publicly-funded infrastructure projects. However, it is uncertain whether the U.S government will limit highway construction to focus on reducing greenhouse emissions. With limited roadway construction, Vulcan could see further revenue losses.

Technically, the stock appears vulnerable.

The stock is in an intermediate-term downtrend. Upon releasing poor earnings during the August 2nd trading week, the stock broke its major uptrend dating back to its March 2009 low. This trend line, which intersects near $42.50, now represents important resistance.

Major resistance lies near $60. In September 2009, Vulcan tested this resistance level. The stock unsuccessfully tested this level again in May 2010. During this time, the major downtrend line -- which has been forming since September 2008 -- merged with resistance around $60. The major downtrend line now intersects with the upper Bollinger band, near $57.

Unable to break resistance or the major downtrend line in May of this year, VMC formed an intermediate-term downtrend. The stock has been falling since.

VMC just breached support near $39. The lower Bollinger band intersects at this level.

Nearby support is at $37.55. This level marks the intersection of the lower channel line. However, if support does not hold here, the stock could tumble to its March 2009 low of $33.38.

VMC is currently well below both the falling 10- and 30-week moving averages. In early July, the 10-week moving average bearishly crossed below the 30-week moving average.

The indicators are bearish. In June, MACD gave a significant sell signal that occurred near the 0-mark. Between June and August, it appeared the sell signal was reversing. But in early August, the sell signal was reaffirmed. The MACD histogram continues to build in negative territory.

Since July 2008, the relative strength index (RSI) was in a major uptrend. However, this uptrend has just been broken. At 35.2 and falling, the indicator has dropped below the key 50 level, but is not yet deeply oversold.

Although stochastics is deeply oversold, it remains on a significant sell signal. Both %K and %D are falling and appear to be approaching a level of support; however, until support is established, an upturn is unlikely.

Vulcan's fundamental outlook is also bumpy.

On August 3rd, the company reported disappointing second-quarter results that were below analysts' expectations.

Revenue for the quarter was -2.3% below Wall Street expectations of $753.1 million. Sales totaled $736.1 million, a small +2% gain from $721.9 million in the year-ago period.

In July, the 13 analysts following the company projected full year 2010 revenue would remain essentially flat at $2.7 billion. Analysts have since revised their estimates downward. They now expect revenue to drop -3.3% to $2.6 billion. Reduced sales of construction material, combined with higher costs to produce these goods, will likely contribute to the expected decline.

By 2011, analysts expect Vulcan will see a +8.6% revenue gain with sales of $2.8 billion. However, this positive outlook is dependent on strong growth in the construction and infrastructure industries which, given the economic outlook, remains highly uncertain.

The earnings outlook is also muted.

For the most recent second quarter, analysts projected a profit of $0.23. Instead, the company reported a loss of -$0.19, compared to a $0.14 profit in the year-ago quarter. The loss was largely due to a hefty one-time $41 million lawsuit settlement with the Illinois Department of Transportation. However, rising construction costs and lower pricing of products also negatively impacted the company.

With weakened demand for Vulcan's products, analysts expect the company will report a loss for the full 2010 year. Analysts project earnings will fall to -$0.41. By comparison, earnings were $0.16 a share in 2009.

For 2011, the 17 analysts reviewing the company have a very mixed outlook. The lowest analyst estimate pegs Vulcan with a loss of -$0.43. However, the highest analyst estimate is for the company to earn a $1.45 profit. Given the weakening economy, I believe the high-end estimates are overly optimistic.

In addition to a potentially weak growth outlook, Vulcan is also richly valued based on its high forward price-to-earnings (P/E) ratio of 95.8.

By comparison, competitor Martin Marietta Materials (NYSE: MLM) has a forward P/E of 23.5. Although this P/E is somewhat high, it is about one third of VMC's. MDU Resources (NYSE: MDU), another competitor, has a forward P/E of 11.9.

Action to Take --> Given that Vulcan is richly valued, has an uncertain fundamental outlook and is technically vulnerable, I think this aggregate materials producer is a good stock to short. I would set a target near $33.38, support established by the stock's 2009 low, and a stop-loss at $42.57 -- resistance marked by the broken major uptrend line.

-- Melvin Pasternak
Editor, Double-Digit Trading
Co-Editor, Trade of the Week