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Get Four
|  | MAY 19, 2005
 SAM STOVALL'S SECTOR WATCH By Sam Stovall No Rock Stars in Building MaterialsSure, momentum has been strong, but S&P doesn't see enough positives to make the sector an enticing playOne group that has been a rock-solid performer in an otherwise uninspiring stock market: Construction materials. Companies in this sector provide crushed stone, sand, and gravel for the highway, commercial, and residential construction markets (the relative strength price chart for the S&P subindustry index, which is a recent addition to the S&P High Momentum list, is shown below). As a reminder, the jagged blue line represents the subindustry index's rolling 52-week price performance as compared with the 52-week performance for the S&P 1500 stock index. Any point above 100 indicates market outperformance over the prior year, while points below 100 indicate market underperformance. The red line is a rolling 39-week moving average, while the two green bands indicate one standard deviation above and below the subindustry index's 14-year mean relative strength. 
During 2004, this subindustry index gained 27.6%, compared with a 10% advance for the S&P 1500. Investors may wonder: Is there any upside potential left? John F. Hingher, CFA, is the S&P equity analyst who follows the group. Even though his fundamental outlook for the construction-materials industry is positive, Hingher believes the valuations of the underlying companies already reflect this optimism. DEFERRED PROJECTS. He notes there have been some mixed "macro" signals lately. McGraw-Hill Construction (MHP ) estimates that highway construction was down 4% in March, 2005, while new bridge starts rose 7%. Congress hasn't yet been able to reach an agreement on replacing the Transportation Equity Act for the 21st Century (TEA-21), which expired in September, 2003, and had been re-extended to the end of May, 2005 (the sixth such extension). A new plan may be near, however, as the U.S. House of Representatives approved a six-year spending plan totaling $284 billion on Mar. 10, 2005. The bill must now be approved by the Senate. The lack of a new multi-year transportation bill to date has disrupted planning and resulted in deferral of state construction projects. INCREASED DEMAND. Meanwhile, production trends for the industry's key products have been favorable, notes Hingher. The U.S. Geological Survey (USGS) reported that crushed stone production in 2004 was 1.60 billion metric tons, up 4.6% from 1.53 billion metric tons in the prior year. The USGS believes the rise was mostly due to favorable weather conditions in most regions of the country and increased activity in public, private, and commercial construction work. The government agency estimates that domestic production and apparent consumption will increase 3.1%, to 1.65 billion tons, in 2005. Looking ahead, gradual increases in demand for crushed stone are anticipated beyond 2005, based on the expected volume of infrastructure work and an expanding U.S. economy. Shortages of the material in some urban and industrialized areas are expected to worsen further, owing to local zoning regulations and land development alternatives. SHIFT TO CRUSHED STONE. The other main category, construction sand and gravel, saw output rise in 2004 to 1.19 billion tons, representing a 2.6% improvement from 2003 and the highest recorded production of construction sand and gravel in U.S. history. The USGS estimates that domestic production and apparent consumption will increase slightly to 1.2 billion tons in 2005. Continued slow growth is expected as the economy keeps expanding, and spending for road and other construction increases. USGS noted that crushed stone has been replacing sand and gravel, especially in more densely populated areas of the eastern U.S. How does S&P view the stocks of industry members? Of the five large-, mid-, and small-cap companies that comprise the subindex, two are followed analytically by S&P: Martin Marietta Materials (MLM ; recent price, $55) and Vulcan Materials (VMC ; $55). S&P has a 3 STARS (hold) rating on each. So there you have it. In S&P's view, the subindustry's momentum looks favorable, but the fundamentals don't support an aggressive stance in the coming year. Industry Momentum List Update For regular readers of the Sector Watch column, here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (price performances in the past 12 months that were among the top 10% of the industries in the S&P 1500), and their proxies (the highest STARS-ranked companies in the sub-industry index -- tie goes to the largest market value) as of May 13, 2005.
Required Disclosures 5-STARS (Strong Buy): Total return is expected to outperform the total return of the S&P 500 Index by a wide margin, with shares rising in price on an absolute basis. 4-STARS (Buy): Total return is expected to outperform the total return of the S&P 500 Index, with shares rising in price on an absolute basis. 3-STARS (Hold): Total return is expected to closely approximate the total return of the S&P 500 Index, with shares generally rising in price on an absolute basis. 2-STARS (Sell): Total return is expected to underperform the total return of the S&P 500 Index and share price is not anticipated to show a gain. 1-STARS (Strong Sell): Total return is expected to underperform the total return of the S&P 500 Index by a wide margin, with shares falling in price on an absolute basis. As of March 31, 2005, SPIAS and their U.S. research analysts have recommended 30.9% of issuers with buy recommendations, 56.6% with hold recommendations and 12.5% with sell recommendations. All of the views expressed in this research report accurately reflect the research analysts' personal views regarding any and all of the subject securities or issuers. No part of the analysts' compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report. Additional information is available upon request to Standard & Poor's, 55 Water Street, New York, NY 10041. Other Disclosures This research report was prepared by Standard & Poor's Investment Advisory Services LLC ("SPIAS"), and may have been provided to you either by: (i) Standard & Poor's under a license agreement with The McGraw-Hill Companies, Inc., which holds the copyright to this report; or (ii) a Standard & Poor's client who is granted a sub-license by Standard & Poor's. This equity research report and recommendations are performed separately from any other analytic activity of Standard & Poor's. Standard & Poor's equity research analysts have no access to non-public information received by other units of Standard & Poor's. Standard & Poor's does not trade in its own account. SPIAS is affiliated with various entities, which may perform services for companies covered by the recommendations in this report. Each such affiliate is operationally independent from SPIAS. Disclaimers This material is based upon information that we consider to be reliable, but neither SPIAS nor its affiliates warrant its completeness or accuracy, and it should not be relied upon as such. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.  Stovall is chief investment strategist for Standard & Poor's All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
BW MALL
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