The Street May Be Overestimating Benefits from Increased Infrastructure Spending -Barron's (MLM, VMC)

An article published in this weekend's Barron's argues that investors may be overestimating the benefits of increase spending for infrastructure companies such as Martin Marietta Materials (NYSE: MLM) and Vulcan Matericals (NYSE: VMC). As the two largest providers of construction aggregates in the US, Obama's proposed massive infrastructure plan will certainly create demand for goods such as gravel, crushed rock and sand, but Barron's believes that a sharp decline in resident and commercial construction will offset these possible benefits.

Barron's also points out that both Martin Marietta and Vulcan look somewhat over-priced at current levels. With shares of Martin Marietta around $88 on Friday, the stock trades at about 20x FY08 expected EPS of $4.37. Meanwhile, Vulcan, at $58, trades around 30x FY08 EPS of $1.94.

Bulls on Martin Marietta and Vulcan will point to each companies strong pricing model: both commodities-related companies have continued to raise prices despite the extreme economic slowdowns around the world. Barron's says that proponents of the two infrastructure plays will argue something like, "if the companies can raise prices in this environment, just think what they can do when business improves." While this may be true, Barron's takes the other side, citing a bearish investor who notes that "the only reason these companies are holding their high valuations is pricing" and that if "pricing gets questioned, these stocks are going to get valued like cyclicals and trade lower."

Shares of both Marietta and Vulcan may be seeing downside today on the back of the bearish Barron's article. Martin Marietta is currently down 5% to $84.41, while shares of Vulcan are down 4.1% to $56.26.

Martin Marietta Materials, Inc. engages in the production and sale of aggregates for the construction industry in the United States, Canada, the Bahamas, and the Caribbean Islands.

Vulcan Materials Company, through its subsidiaries, produces construction aggregates and other construction materials in the United States and Mexico.

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