Eagle Materials Nails Double-Digit Earnings Gains
Gypsum wallboard and paperboard may not be the flashiest products on the market, but they've sure been big moneymakers forEagle Materials .
Eagle ( EXP ) manufactures basic building products used in residential, industrial, commercial and infrastructure construction. After going through a tough stretch during the housing slump along with the rest of its industry, the Dallas-based company has made an impressive comeback the past few quarters, thanks to the nascent recovery in housing and construction.
Profits have soared at least 67% the past five quarters, while sales have climbed at least 19%.
"2012 was the breakout year for construction when it began recovering with housing leading the way," said Sterne, Agee & Leach analyst Todd Vencil.
In addition to wallboard and paperboard, Eagle also makes cement, including specialty cement used in oil and gas wells. But its wallboard and paperboard business, which sells mainly to the housing market, has been the biggest growth driver of late.
In the third quarter of fiscal 2013, which ended Dec. 31, wallboard and paperboard operating income climbed 362% from a year earlier amid healthy volume growth and a big spike in wallboard prices. Wallboard volume was up a solid 23% from a year earlier. The segment's total revenue rose 37% to $100.3 million.
Vencil says the industry put through a 35% increase in the price of gypsum wallboard as of Jan. 1, 2012.
"That was the biggest factor in the year-over-year growth in Eagle's results," Vencil said.
In the third quarter, Eagle's average net sales price for the gypsum wallboard was up 27% vs. a year earlier.
Overall, Eagle's third-quarter earnings rose 115% to 43 cents a share. Revenue climbed 33% to $164.7 million.
Operating earnings from the cement, concrete and aggregates business was up 7% from a year earlier. Revenue rose 22%. Cement sales volume reached 818,000 tons in the third, up 17% from a year earlier. It saw a 3% increase in its average net cement sales price.
Analysts surveyed by Thomson Reuters estimate that earnings rose 105% in the fourth quarter to 41 cents a share. They expect full-year earnings to soar 170% to $1.65 a share. They see a 72% pop in earnings in 2014.
"I think we are at the beginning stage of a multiyear construction recovery," Vencil said. "Demand and volumes should grow very nicely for the next several years in both Eagle's cement and wallboard businesses."
Vencil upgraded Eagle's stock to a buy from a neutral in a Feb. 22 note.
"We believe Eagle is one of our highest-quality names, based on its businesses, assets, balance sheet, and management team," he wrote in the note.
The company has "low-cost positions" in its core cement and wallboard markets, he added, and several new product opportunities.
While wallboard has been a big growth driver of late, prospects for Eagle's cement business are also looking up in the wake of a recent buy.
In November, Eagle closed on the purchase of Lafarge North America's Sugar Creek, Mo., and Tulsa, Okla., cement plants. It also acquired related assets, which included six distribution terminals, two aggregates quarries, eight ready-mix concrete plants and a fly ash business.
Under the deal, Eagle also entered into a transition sales agreement to supply certain Lafarge operations with cement for four to five years, and an agreement with a Lafarge affiliate to supply low-cost alternative fuels to the acquired operations.
Eagle paid $446 million for the Lafarge plants and assets, subject to customary post-closing adjustments. The trailing 12-month revenue through June 30, 2012, for the cement plants and related assets was $178 million. The acquisition will increase Eagle's U.S. cement capacity by roughly 60%.
"These assets will allow us to participate more fully in the U.S. construction industry recovery," said Chief Executive Steven Rowley in announcing the deal. "Additionally, this transaction further positions the company near energy growth markets where there is growing demand for our specialty oil well cement along with our newly offered high-quality northern white frac sand."
Frac sand is crush-resistant sand used by the petroleum industry in the hydraulic fracturing process.
Rowley said the acquired assets will quickly contribute profit and cash. They will also provide "significant" near-term opportunities for synergies and earnings growth.
With the acquisition, cement will be a very important driver of Eagle's business going forward, says D.A. Davidson & Co. analyst Brent Thielman.
Cement was important to the business in the past, he adds, but the Lafarge buy expanded Eagle's cement capacity significantly.
Eagle has other business plans on the drawing board that watchers expect will help propel growth.
In 2012, Eagle bought land with mineral reserves in the Midwest so it can develop a frac sand business to serve the oil services and other industrial end markets. It has finalized permitting and plant design and is focused on plant construction, according to a company filing with the SEC.
It's also continuing to increase its production of specialty oil and gas well cement. This specialty cement generates higher profit margins than other cement sales, the company says, and Eagle is among the few companies that produce it.