Thompson Research Group

TRG this past week spent time in NYC and Boston meeting with our valued clients and marketing with Construction Partners (ROAD) and Knife River (KNF). KNF made its debut as a public company in 2023 after spinning out of MDU Resources, and ROAD went public in May 2018, just before the global pandemic. Both companies are relatively newcomers to the public markets, a rarity for “old world” infrastructure and road construction industries. While in completely different geographies, both share a focus on building infrastructure/roads in what many would view as "second tier" cities. These are cities in which vertical integration is often a necessity to meet community needs (i.e., it makes more sense to own a quarry to service asphalt operations). Both benefit from the secular trend of the reindustrialization of the U.S./North American market, a trend TRG believes has a long tail for growth (10 years at least). Each company brings a different strategy flavor to the table. KNF’s margin expansion is a significant lever for growth. In our opinion, KNF was an “orphaned asset” under the MDU umbrella, and now as an independent entity, KNF has a greater ability to focus on value creation. To that end, KNF has already hit its 15% EBITDA margin bogie two years early (original target was 2025). The next stop is 20%+, which we believe will come from a mix of pricing, cost control, and mix shift to materials focused from both organic and acquired efforts. ROAD continues to consolidate the asphalt road construction market in the southeast, focused on disciplined growth and staying focused on its asphalt-centered infrastructure strategy. ROAD management shared that there remain ample growth opportunities in the sunbelt states it currently operates and continues to expect to grow 15-20% per year through a combination of organic activity and M&A. Despite weather headlines that dominated Q2, both KNF and ROAD outperformed the industry. #trgbuildingideas

TRG this past week spent time in NYC and Boston meeting with our valued clients and marketing with Construction Partners (ROAD) and Knife River (KNF). KNF made its debut as a public company in 2023 after spinning out of MDU Resources, and ROAD went public in May 2018, just before the global pandemic. Both companies are relatively newcomers to the public markets, a rarity for “old world” infrastructure and road construction industries. While in completely different geographies, both share a focus on building infrastructure/roads in what many would view as "second tier" cities. These are cities in which vertical integration is often a necessity to meet community needs (i.e., it makes more sense to own a quarry to service asphalt operations). Both benefit from the secular trend of the reindustrialization of the U.S./North American market, a trend TRG believes has a long tail for growth (10 years at least). Each company brings a different strategy flavor to the table. KNF’s margin expansion is a significant lever for growth. In our opinion, KNF was an “orphaned asset” under the MDU umbrella, and now as an independent entity, KNF has a greater ability to focus on value creation. To that end, KNF has already hit its 15% EBITDA margin bogie two years early (original target was 2025). The next stop is 20%+, which we believe will come from a mix of pricing, cost control, and mix shift to materials focused from both organic and acquired efforts. ROAD continues to consolidate the asphalt road construction market in the southeast, focused on disciplined growth and staying focused on its asphalt-centered infrastructure strategy. ROAD management shared that there remain ample growth opportunities in the sunbelt states it currently operates and continues to expect to grow 15-20% per year through a combination of organic activity and M&A. Despite weather headlines that dominated Q2, both KNF and ROAD outperformed the industry. #trgbuildingideas

TRG recently marketed with Granite Construction (GVA) in the Northeast. Many TRG clients are interested in ways to play companies that benefit from IIJA and road maintenance and construction. GVA is certainly one of those, with a number of company-specific catalysts that to their earnings profile in the coming years. Furthermore, the multiple on GVA is at a sizable to discount to public peers KNF and ROAD. We believe the name is compelling on a value basis and for its upcoming catalysts (e.g., Granite intends to expand disclosures in its Materials segment and provide long-term guidance on its next quarterly call). #trgbuildingideas

TRG core state revenue collections once again fared better than expected in FY’24, having anticipated a decline of between 2-3%. California seems to have righted the ship, outperforming peer states as its GF collections were up a solid 24.2% YOY (Q4 up 48.0%). Excluding California’s strength, other core states combined for a modest 1.4% YOY gain. As Virginia’s Secretary of Finance stated earlier this month, the unexpected strength in revenues were due to 1. unrealized recession concerns, 2. an increase in non-farm payrolls (albeit as a slower pace), and 3. consumers continuing to spend. The Secretary went on to say the state has never been in a stronger position. In fact, reserve balances are above the 15% statutory cap and the state expects to return over $8B to taxpayers. Other states, e.g. Tennessee, have also stated they are “well-prepared” for any potential downturn with a flush rainy day fund. Looking into FY’25, the majority of states are forecasting small GF gains of 1-2%. Fortunately for much of our coverage group, strong budgets also trickled down to the DOTs. As reported in earlier TRG reports, only 20% of IIJA funding has been spent. In a recent conversation, a Florida DOT contact shared only $700MM of the $4.4B approved in additional state-led funding has been spent to date. We continue to believe the public construction outlook is solid. #trgbuildingideas

CBRE recently published its 1H’24 North America Data Center Trends Report, which adds another perspective on just how hot this vertical is. We are calling this out as many names in TRG’s coverage (or adjacent to it) are poised to continue benefitting from the data center build-out. Key trends from the report – overwhelmingly positive: Supply is up 10% YOY in 1H’24 and despite higher supply, vacancy rate fell 50 bps to 2.8%, a record low. In secondary markets vacancy rate fell a hair below 10% from ~13% last year. Under-construction activity in primary markets hit a record high of 3,871.8 MW, up 69% YOY, with nearly 80% being preleased. Pricing continues to trend higher. One interesting trend is that the increased demand for high-power computing is creating a significant price gap between new facilities and legacy facilities. Many existing data centers do not have the infrastructure to handle increasingly demanding workloads. This, in our view, further bolsters the need for new construction activity. While demand for more data, computing and storage is almost certain to continue, the supply of data centers that can manage this will meaningfully increase. This means that newbuild is the answer, and there is not an abundance of land and power supply to meet this easily. Key components of data centers are also on long lead times – e.g., transformers, switches, and generators. For certain key equipment, orders must be placed years in advance. Competitively, between both domestic companies and international tech companies, occupiers of data centers are forced to stay ahead of the curve. As such, many occupiers are virtually “forced to prelease space between two and four years ahead of completion to meet their future data center requirements.” We liken this competitive pressure to all companies in the tech value chain (cloud providers, chip and semiconductor producers, cloud software companies, digital commerce businesses) being in a multi-year effort that is like the final 100 meters of a 400-meter race. This is positive for many of our covered companies who help to build and maintain operations of the data center market. Those companies include: equipment rental and leasing providers, manufacturers and distributors of ceiling tiles and wallboard, aggregate and cement producers, HVAC manufacturers and distributors, non-res electrical and mechanical contractors, fire and safety supply and servicing, etc. #trgbuildingideas

On Monday, September 16th, TRG is hosting a Fireside Chat with Builders FirstSource at 11am EST. Use the link below to register. https://lnkd.in/eJnCGm28

TRG is pleased to announce a unique heavy materials-focused field trip in Raleigh, NC on December 6th. Leaning into TRG’s differentiated policy research, we will join the leadership of the North Carolina Department of Transportation (NCDOT) to discuss a wide array of important questions impacting TRG’s coverage universe such as letting and construction forecasts, federal and state-led funding initiatives, and infrastructure priorities in a new Presidential administration. We will also visit with the top management teams of both Martin Marietta Materials (MLM) and Construction Partners (ROAD) at their headquarters and don our hard hats for a quarry tour. This field trip will help set the stage for how domestic heavy materials producers (and state DOTs) are positioning themselves over the next 12-24 months. #trgbuildingideas

TRG is pleased to announce a unique heavy materials-focused field trip in Raleigh, NC on December 6th. Leaning into TRG’s differentiated policy research, we will join the leadership of the North Carolina Department of Transportation (NCDOT) to discuss a wide array of important questions impacting TRG’s coverage universe such as letting and construction forecasts, federal and state-led funding initiatives, and infrastructure priorities in a new Presidential administration. We will also visit with the top management teams of both Martin Marietta Materials (MLM) and Construction Partners (ROAD) at their headquarters and don our hard hats for a quarry tour. This field trip will help set the stage for how domestic heavy materials producers (and state DOTs) are positioning themselves over the next 12-24 months. #trgbuildingideas

This week saw the majority of the heavy materials companies report earnings and we would note some similar themes as the group put up pretty sunny results considering the horrible weather that clouded much of the quarter. Most important in our view is that pricing guidance remains intact with expectations for LDD pricing the general consensus among companies. We viewed each company’s Q2 results as largely positive, with some raising FY guidance (CRH, KNF, ROAD), and some seeing margin growth despite volume challenges (MLM, SUM, VMC). Note that those who are less exposed to the weather impacted regions from Q2 were the ones to raise guidance, while the more weather region exposed companies still had solid performance across most metrics other than volume. From an end market perspective state budgets remain solid with DOT’s still seeing plenty of runway for work, non-res remains better than headlines would indicate with heavy manufacturing / megaprojects / reshoring called out across most conference calls, while residential demand has been slower to come back than previously expected. The outlook going forward remains solid, and any guidance revisions downward were more a function of running out of days in the year to catch up on volumes rather than a deterioration in demand. Volumes are not lost, just pushed out, and if guidance was for the NTM timeframe rather than a fixed FY’24 we expect most companies would feel as good about the outlook as before (we know TRG does!). #trgbuildingideas

This week saw the majority of the heavy materials companies report earnings and we would note some similar themes as the group put up pretty sunny results considering the horrible weather that clouded much of the quarter. Most important in our view is that pricing guidance remains intact with expectations for LDD pricing the general consensus among companies. We viewed each company’s Q2 results as largely positive, with some raising FY guidance (CRH, KNF, ROAD), and some seeing margin growth despite volume challenges (MLM, SUM, VMC). Note that those who are less exposed to the weather impacted regions from Q2 were the ones to raise guidance, while the more weather region exposed companies still had solid performance across most metrics other than volume. From an end market perspective state budgets remain solid with DOT’s still seeing plenty of runway for work, non-res remains better than headlines would indicate with heavy manufacturing / megaprojects / reshoring called out across most conference calls, while residential demand has been slower to come back than previously expected. The outlook going forward remains solid, and any guidance revisions downward were more a function of running out of days in the year to catch up on volumes rather than a deterioration in demand. Volumes are not lost, just pushed out, and if guidance was for the NTM timeframe rather than a fixed FY’24 we expect most companies would feel as good about the outlook as before (we know TRG does!). #trgbuildingideas