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What's Behind Vulcan's Climb

"It makes you wonder what people are seeing out there in the construction environment," he says.

The bearish thesis on Vulcan is that the downturn in government-funded construction -- due to slowing property tax and sales tax revenues -- has only yet begun, which will hurt future earnings. I highlighted Vulcan -- along with HNI (HNI - Get Report) and Perini (PCR) -- back in January as a bearish stock pick, when Vulcan shares traded around $69.

About 17% of the stock is being sold short -- meaning investors are betting on a decline.

The bearish thesis on Vulcan is still in place today, since historically 40% of the firm's business is tied to publicly funded construction projects, as the firm itself cites in its annual report. The company's heaviest exposure is to Florida and California, which are both facing brutal housing markets and state budget deficits not set to ease anytime soon.

Inelastic-Demand Boost

The bull case on the stock is that Vulcan's main products are experiencing sharp pricing even in the face of declining demand. The numbers are truly impressive, but if the economy really is heading into the toilet, the positive results may not last.

For example, in the first quarter, Vulcan's aggregates revenue rose 5% on the heels of a 9% year-over-year increase in price, with a 4% decline in volumes.

In economics, an important concept is the elasticity of demand, which measures the ratio of the percentage change in quantity demanded vs. the percentage change in price. If the absolute value of the ratio is less than 1, then demand is considered to be inelastic.
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