In line with its strategy to strengthen the aggregates business, Martin Marietta Materials, Inc. MLM entered into an agreement to acquire Bluegrass Materials Company for $1.625 billion in cash.

Bluegrass Materials Company, a wholly owned subsidiary of Panadero Aggregates Holdings, is the largest privately-held aggregates company in the U.S. operating in 23 active sites across Georgia, South Carolina, Maryland, Kentucky and Tennessee.

Buyout Benefits

The addition of Bluegrass will enhance Martin Marietta’s aggregates position in high-growth regions of Southeastern and Mid-Atlantic. Martin Marietta already holds a strong position in the Southeastern region, having reported a 16% increase in volumes in the first quarter of 2017.

Martin Marietta expects the deal to provide it with “a strategic new growth platform”. Bluegrass’ strategic assets complement Martin Marietta’s. Together, the companies aim to achieve growth, operational excellence and cost discipline, thereby delivering increased shareholders’ value. Martin Marietta also expects to achieve annual run-rate cost savings of about $15 million.

The transaction is expected to close in the fourth quarter of 2017 and prove accretive to earnings in the first full year.

Inorganic Drive Strong

Notably, Martin Marietta has completed over 85 smaller acquisitions since its initial public offering in 1994, which strengthened its position in the Aggregates business.

Martin Marietta’s acquisition of Texas Industries in 2014 solidified its position in the aggregates market and increased its presence in high-end markets like Texas. The Texas Industries acquisition generated synergies of $100 million.

In 2016, the company invested $179 million in acquisitions. It acquired two Colorado-based companies – Rocky Mountain Materials and Asphalt, Inc. and Rocky Mountain Premix Inc.  The acquisition provides more than 500 million tons of mineral reserves and expands Martin Marietta’s footprint along the Front Range of the Rocky Mountains.  Strategic acquisitions completed in 2016 contributed $27 million to first-quarter 2017 net sales growth with modest margin contribution.

Stock Price Movement

Shares of Martin Marietta have underperformed the Zacks categorized Building Cement Concrete and Aggregates industry, so far this year. While the industry saw growth of 7.4%, Martin Marietta’s shares rallied 4.8% over the same time frame. Meanwhile, estimates for the current year and the next have remained stable for this Zacks Rank #3 (Hold) company over the last 30 days.

Nonetheless, the company’s string of acquisitions and divestitures will likely improve performance. Also, an uptick in private and public construction activity is expected to boost demand.

Stocks to Consider

Better-ranked stocks in the broader construction sector include Lyon William Homes WLH, KB Home KBH and Acuity Brands Inc AYI.

All three companies carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Lyon William, a Zacks Rank #2 stock, is expected to exhibit 38.4% growth in 2017 earnings.

KB Home is likely to witness a 43.3% rise in fiscal 2017 earnings, while Acuity Brands is expected to see 3.3% growth in fiscal 2017 earnings.

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