Was Einhorn Wrong or Early on Martin Marietta Materials?

Billionaire David Einhorn of Greenlight Capital is closely followed, possibly most closely when he gives public presentations at investor conferences. See Einhorn’s most recent stock picks. He famously recommended shorting Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR) in October 2011, before the stock began plummeting; he had also been a public critic and short seller of Lehman Brothers in late 2007 and 2008. Einhorn led his presentation at the mid-May Ira Sohn Conference with a short thesis on Martin Marietta Materials, Inc. (NYSE:MLM). The stock is up 22% since then, easily beating the market. The stock had been declining quite a bit in early May, so it might not be entirely fair to measure its performance from the conference date, but even if we use the beginning of May as our baseline Martin Marietta is up 11% against a flat market.

The core of Einhorn’s thesis was simple. The stock was trailing at a P/E of more than 30, implying that the market was expecting strong growth, but net income should actually be coming down as the construction materials company (providing products such as limestone, granite, sand, and gravel) lost the benefits of short term fiscal stimulus. Business has still been good however, and in the third quarter of the year Martin Marietta Materials, Inc. experienced an 18% increase in revenue compared to the same period in 2011. Earnings were up 28%. Net income was actually down in the first nine months of 2012 versus a year ago, but that is more than accounted for by an unusual amount of business development costs in the first half of this year.

Martin Marietta’s valuation does look high, however, and while we don’t have any information as to whether or not Einhorn is still short (short positions are not disclosed in 13F filings) it’s possible that Greenlight was merely early. The forward P/E is 28, and that incorporates high growth expectations on the sell side for 2013. Even over the longer term analyst consensus is for fairly low earnings in relation to the stock price, with a five-year PEG ratio of 4. There have been significant insider sales at Martin Marietta, and the most recent data shows that 18% of outstanding shares are held short.

While a number of hedge funds and other notable investors have large positions in the stock, the top holders in our database of 13F filings weren’t very excited about the company during the third quarter of 2012. Tiger Cub John Griffin’s hedge fund Blue Ridge Capital cut its stake 22% to just under 2 million shares (check out Griffin’s favorite stocks) while Southeastern Asset Management and SPO Advisory held their positions about constant.

Vulcan Materials Company (NYSE:VMC) and Owens Corning (NYSE:OC) are the closest peers for Martin Marietta Materials, Inc., and we can also compare the company to other building materials providers such as Masco Corporation (NYSE:MAS) and Armstrong World Industries, Inc. (NYSE:AWI). Vulcan has been struggling to be profitable at all despite its valuation of $6.7 billion, so investors may be acting even more optimistic about that company. Owens Corning had its revenue and earnings decline at double digit rates last quarter versus a year earlier, though its P/E multiples are at a bit of a discount to Martin Marietta: the forward P/E, for example, is 16. Those consensus earnings are much higher than what the company has done on a trailing basis, so we don’t think that Owens Corning is a good buy either. Masco is in a similar position to these two peers. Armstrong has even higher short interest than Martin Marietta, but its multiples look more modest and so we’d advise against taking a short position.

So far Einhorn has been wrong on Martin Marietta, but even with the stock’s good performance since earlier this year we don’t think that it’s a buy right now. The growth numbers are a plus, but judging by the P/E multiples the market seems to have priced in an even higher growth rate over the next few years.