BOSTON ( TheStreet) -- Vulcan Materials ( VMC) is loathed by analysts, ranking as the 20th worst-rated S&P 500 stock. Two rate it "buy" while 13 rate it "hold." Three rank it "sell."
The construction-materials seller's stock has fallen 23% in a year. Citigroup, valuing Vulcan at $30, expects shares to drop 26%. Yet, value-focused Morningstar dissents, awarding Vulcan a five-star rating and predicting a climb of 68%. Vulcan produces and sells so-called construction aggregates, ranging from crushed stone to concrete mix. The company's business is tied directly to construction activity, which has been in a trough since the recession hit. However, Vulcan has what Morningstar refers to as a "wide economic moat" or sustainable competitive advantages. There are few players in this niche field and, given ongoing housing woes, the likelihood of new entrants is remote. Consequently, 2011 may be an outstanding buying opportunity for opportunistic investors as sentiment for Vulcan is abysmal, but it will surely benefit from the eventual rebound in construction activity. The issue, as always with value stocks, is the timeline of fundamental improvement. Vulcan's third-quarter net income decreased 76% to $13 million and earnings per share plummeted 79% to eight cents. Sales declined a more modest 4.5% to $743 million. On an adjusted basis (excluding one-time items), profit missed analysts' consensus forecast by a whopping 53%. Furthermore, sales missed the consensus by 10%. Vulcan has missed on the top line for eight consecutive quarters and the bottom line for four. It's no wonder that the company is panned by sell-side researchers. And a cursory glance at valuation probably deters most bargain hunters. Vulcan shares fetch a cash-flow multiple of 23, a sizable premium to index averages. Vulcan is down 32% from a 52-week high. Understanding why Vulcan might be a great investment, despite horrific ratings, requires comprehension of the bias of researchers. Sell-side analysts are held to a 12-month horizon, so their task is to pick stocks most likely to deliver double-digit percentage gains over that span. Clearly, Vulcan doesn't fall into this category. In fact, it might even drop in 2011. But, long-term investors know that bargain hunting requires patience and the best value stocks are of companies that are out-of-favor, but likely to remain viable, with a high probability of an eventual profitable turnaround. Institutional investors prove the stock's worth.