Does US Steel make sense?

Current TEV, normalized earnings around 1.5B EBIT, although were 3B at the peak. When are the normalized going to come given ~50% current capacity utilization. To me the valuation seems pricey - after all in 2005-2006, presumably better than normal time / average at best the stock was priced ~40, vs 54 right now. Think there's bidding up by investors fishing for recovery that are bound to be disappointed. Thumbs down on this one.

Trade idea: Paychex vs ADP

Both businesses provide payroll/HR outsourcing services, with PAYX targeting smaller businesses (17 employees on avg) vs ADP's 96. Historically growth rates have been similar at 10-12% revenue, and multiples have been ~20-22x P/E. Now however PAYX is trading much more expensively at 22x P/E while ADP is around 16.5, even cheaper counting in the cash. I think the multiple gap should converge to ~2.5x => PAYX should fall ~15%.

ADP segments include Employer Services, within it basic payroll offering (delivering the checks, tax filing, w2 forms, direct deposit), and beyond payroll (retirement benefits management, insurance services like workers comp, other benefits admin). This segment is ~80% of income and 72% of revs. PEO segment - fully outsourced HR for SMB, not very profitable (5% of PBT, 12% of revs). Dealer services is a back-office solution for 25K auto dealers. ADP has ~600K clients, average retention is 90%.

Historically PAYX has traded at 25% premium to ADP, however believe this might be skewed as ADP used to own Brokerage Services and Travel Clearing business that it divested in 2007 - businesses and growth rates should be more comparable now.

Market dynamic: three top guys (ADP, PAYX, Ceridian) are around 60% of the market. Pricing typically works per employee: say $1 charge per each of 25 pay cycles on the low end, $6 per cycle for smaller firms.

Vulcan Materials - Short or Not?

Vulcan is produces aggregates, asphalt, and cement businesses. Aggregates (crushed stone, sand and gravel) are 65% of revenues, asphalt and concrete is 32%, with 88% of GP coming from aggregates. Generally a local market - high costs of shipping. 13.5B tons of reserves. Private non-residential is 41%, residential is 17%, highway is 26% of revenues and other public is another 13%. Energy costs are important (10-15% of COGS), with diesel declining, it should provide a nice boost to Gross Margin, but there will be a negative impact from volume decline. Company has a fair debt burden after Florida Rock acquisition in 2007 ($3B).

The stock has run up due to the excitement over the stimulus bill. The jump in spending will be one time increase in U.S. highway expenditures from by $28B from the ARRA (american recovery and reinvestment act), as the spending on highways will increase from annual $40B. Additional hope is the increase in highway spending from $286B allocated over 6 years by previous bill to up to $450-500B in the next 6 years. CBO is only expecting a moderate increase though, and with giant deficits it's hard to see how the larger number would fly. In record year (2006) Vulcan shipped 290M tons of aggregates, while for 2009 only ~150M. For 2009, EBITDA was only 450M, while the current TEV is 8B. At the very top of the cycle in 2006, earnings were 1B.

Need to understand - why has the pricing been strong?

Recent results: shipments down 23%, pricing up 5%. Expect 2010 numbers to be up 0-5 on volume, 2-3% price.
Total revenues for the year were $2.5B, with operating earnings at $150M.
In 2010, management projects public works + highway to be ~50% of the business.