“What makes a rock pit valuable is that nobody else can compete with it. The nearest rival owner from two towns over isn’t going to haul his rock into your territory because the trucking bills would eat up all his profit. No matter how good the rocks are in Chicago, no Chicago rock-pit owner can ever invade your territory in Brooklyn or Detroit. Due to the weight of the rocks, aggregates are an exclusive franchise. You don’t have to pay a dozen lawyers to protect it.”
-Peter Lynch in One Up On Wall Street, 1989
What Peter Lynch observed thirty-five years ago is still true today: the rock business is boring but extremely profitable. The absolute dollar values of crushed stone and sand are not eye-popping; a ton of crushed rock might sell for $12 or $13 per ton, while gravel might sell for $10 per ton. But, collectively, these “aggregates” as they are called are extremely valuable because they are the critical ingredients that form the basis of the buildings in which we work, the houses in which we live, and the roads that connect us. This bizarre combination of absolute necessity but relative worthlessness is the key to the strong economics of the aggregates business which relies on persistent pricing power.
Consider that over the last fifty years, despite nasty recessions, conflicts, plagues, and so on, pricing for aggregates has increased at around 4.7% annually, well above the 3.85% annual inflation rate, and without a single year-over-year decline:
Furthermore, as Martin Marietta’s CEO, C. Howard Nye remarked at a 2020 industry conference, aggregates fall into the coveted “critical, but non-core” part of the value chain:
“So remember, we’re 10% of the cost of building a road, 2% of building a home, and somewhere between those two on [non-residential]. So we’re never going to make or break a project.”
In other words, aggregates producers have unique pricing power because they are essential but also do not constitute a significant cost of any construction project. A good illustration of this is that in the decade spanning 2012 – 2022, total construction spending grew at a ~7.3% annualized rate, but aggregates spending grew at a ~5.6% rate, thus falling as a percentage of the overall cost:
Another attractive feature of the aggregates business is its highly fragmented industry structure. Estimates vary, but there are somewhere between 1,000 and 2,000 going aggregates concerns in the United States with almost half of the operators with marginal market share in revenue terms*:
One of the reasons for the extreme fragmentation in the industry is the boom in infrastructure spending during the Eisenhower presidency with massive federal spending to build out the interstate highway system. Many operators trace their roots to that period and remain family-owned, but now, in many cases, the younger generations are not necessarily interested in continuing in the aggregates business. In addition, because permits for new quarries or mines are difficult to come by, it is simply more efficient for larger companies to grow within the industry via acquisition. These dynamics create an opportunity for the larger players to consolidate the industry and provide the benefits of scale. As I discussed in 2022’s The Optimal Industry Structure, it is often these types of industry consolidators that create some of the biggest long-term winners in the stock market.
It is this formula of consistent price increases along with opportunistic acquisitions that have propelled two of the larger aggregates companies, Vulcan Materials and Martin Marietta, to market-beating results over the last ~30 years:
It seems safe to assume that as long as the United States remains a dynamic and wealthy country with shifting populations, increased urbanization, and massive transportation spending needs, the rock business will continue to thrive for decades to come.
*In 2022, John McPherson of Vulcan Materials mentioned an estimated 5,000 operators in the industry, but this is certainly one of the highest estimates I’ve seen.
Disclaimer: At time of publication, the author owned shares of Knife River while clients of Fortune Financial Advisors, LLC, held positions in Knife River and CRH.
