Eagle Materials (EXP) was founded in 1963 as a building materials subsidiary of Centex Corporation. In 2004, Centex completed a tax-free distribution of its shares in EXP to its shareholders.
EXP manufactures, distributes and sells basic materials with broad applications as construction products, building materials, and basic materials used for oil and natural gas extraction, though oil and gas are only 6% of EXP revenues.
Standpoint research made EXP a “buy” in early April targeting $88 by 2017-18.
With 100% of its sales derived from the United States, EXP has been well-positioned to capitalize on the cyclical tailwinds following 2007. Despite this economic recovery, the Company’s revenues have still not topped their highs peaked back in 2007. The housing market has made tremendous gains but is still not near levels from the previous decade. Despite the sideways trend in the housing market during the last few months, analysts say this market will improve and drive the majority of Eagle’s revenues from gypsum wallboard and concrete and aggregates segments higher into 2016.
Moody’s Analytics projects a sharp increase in the seasonally adjusted annual rate of single-family home sales out to 2020, creating increased demand for construction materials. Home construction has been relatively stagnant in the slow recovery from the housing crisis but is due to catch up.
EXP sells cement in six regional markets. They have three concrete and aggregates businesses and the company recently began selling frac sand for use in the hydraulic fracturing of oil and gas wells.
EXP has seen gross margin expansion as pricing has improved during the past few years, especially within the gypsum division, which accounts for more than 50% of EBITDA. Both cement and gypsum products are highly commoditized. Expanding operating margins and growing revenue have yielded impressive improvements to operating cash flow, which has nearly doubled from $124 million in 2013 to 240 million in 2016. Given the relatively light capital expenditure requirements for EXP factories, this has freed up cash for acquisitions: It has spent nearly $750 million during the past few years on new business lines and consolidating existing products.
EXP products are commodities that are essential in commercial and residential construction, public construction projects, projects to build, expand and repair roads and highways and in natural gas and oil extraction. Demand for these products is generally cyclical and seasonal, depending on economic and geographic conditions. EXP’s operations are geographically diverse, providing them with regional economic diversification. Demand for cement, concrete and aggregates may fluctuate more widely because local and regional markets can be more sensitive to economic changes. The company’s gypsum wallboard and paperboard operations are more national in scope.
Concrete and aggregates revenues increased 11% to $108 million for fiscal 2015, compared to $97 million for fiscal 2014. It was the fourth consecutive year of revenue, net income and profit growth for the division (see “Soaring higher”).
A theme to monitor that might not be clear to new investors in this company is the possible tailwind from highway infrastructure spending. Highway infrastructure spending peaked in 2009, just as the recession hit full swing. While state and local government roadway spending has recovered and now exceeds 2009 levels, the federal government’s share of spending is still stagnant. The political process is lengthy and tiresome, and infrastructure has been an easy target for political lawmakers looking to reduce deficits. However, America’s roadways continuously receive failing grades from watchdog groups. Eventually, the federal government’s hand will be forced.