Should You Buy It? Vulcan Materials

The company may be facing its own credit crunch in 2009 as Vulcan took on a lot of debt to buy Florida Rock. The company ended the third quarter with $3.68 billion of total debt (93% of common equity), compared with $469.6 million of total borrowing (20% of common equity) the year before. That's a red flag for Vulcan, which ended the last quarter with just $91 million of cash on the balance sheet -- especially when you figure the company has $575 million of debt coming due by 2010.

Vulcan's finances also call into question the stability of its 49-cent quarterly dividend (3.1% yield). The company's earnings are expected to fall more than 40% in 2008 to $1.90 a share, which isn't enough to cover the annual payout. With just 2% to 3% earnings growth expected in 2009, management will struggle to maintain the current dividend rate.

Even with the prospect of a new infrastructure stimulus plan, it will take a lot more demand across the globe to get Vulcan back into the sweet spot it was operating in a couple of years ago. In the meantime, the company is still paying down the debt it incurred for the Florida Rock acquisition, which was priced in a much more positive operating environment.

With that in mind, I believe that readers should avoid shares of Vulcan Materials at current levels. As oversold as the stock may have looked six weeks ago down in the low $40s, I don't believe that investors should chase the shares up here.

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Know what you own: Other building materials stocks include Fastenal (FAST - commentary - Cramer's Take), Martin Marietta Materials (MLM - commentary - Cramer's Take), MDU Resources (MDU - commentary - Cramer's Take), Valspar (VAL - commentary - Cramer's Take), RPM International (RPM - commentary - Cramer's Take) and Armstrong World Industries (AWI - commentary - Cramer's Take). For more on the value of knowing what you own, visit TheStreet.com's Investing A-to-Z section.

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David Peltier is a research associate at TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback; click here to send him an email.

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