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Eagle Materials (EXP) Write Up

Eagle Materials (EXP) Write Up

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Published by: frogskiss on Oct 09, 2012
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AndrewAugust,www.thefrogskiss.blogspot.comNovember9,2011EagleMaterialsisaconstructionmaterialscompanythatprimarilymanufactureswallboardandcement.Itiscertainlyabeatdownstockintheaftermathofthehousingbubbleandtheweakeconomy.Thesharepriceisaslowasitwasin08/09andtheentiresectorissuffering.Eagleseemstobebettermanagedthanotherconstructionmaterialscompaniesortheyarejustfortuitouslyexposedtotherightregionsandneverlettheircapitalstructuregetoutofhand.Whiletheypurporttobealow-costmanufacturer,ithasn’tbeenreadilyapparentuntilthepastseveralyearsasindustryutilizationshrunkdramaticallyandEaglemaintainedprofitability.Notonlyarenormalizedearningsgreaterthaninthepastcycle,butEagleseemspositionedtomakeopportunisticacquisitionsasmanycompetitorsareengagedinassetdivestitures.Eagleisawell-runcompanythatshouldbenefitfromarecoveryinhousing,althoughitwillbeabletocontinuetogeneratecashevenifarecoveryisnotimminent.
Overview
EagleMaterialsisaspinofffromCentex,ahomebuildernowpartofPulteHomes.Thebusinessiscomprisedof2aggregatequarries,4cementplantsand5wallboardplants,andapaperboardplant.Thecompany’skeyfocusisbeingalowcostproducer.Financialresultsoverthepastseveralyearssupportsthisclaimsincethewallboardandcementindustrieshavebeenoperatingat50-70%capacitynationwide.EagleisprimarilypositionedinhealthiermarketsintheSouthernUSfromasupply/demandperspective.Eagleexpandedcapacityfrom2005-2007initscementandwallboardfacilities,soprofitsoverthenextcycleshouldexceedthoseofthepastcycle.
FiscalYearendedMarch31
20112010200920082007200620052004Paperboard
Revenue104.890.2116.4133.4127.5133.5125.2112.4OperatingIncome12.114.816.617.019.020.125.420.9
Wallboard
Revenue204.5210.7279.3342.6511.6479.1350.1272.9OperatingIncome1.21.41.246.0198.1154.281.635.6
Cement
Revenue225.8228.5289.4345.2321.9285.3211.3181.9OperatingIncome45.758.082.0106.692.278.357.650.5
Aggregates&Concrete
Revenue44.245.666.287.697.389.870.863.1OperatingIncome0.81.84.613.116.29.67.76.0
CorporateOverhead
16.715.916.918.820.316.410.39.3
EBIT
43.160.187.5163.9305.2245.8162103.7
Interest
16.521.528.921.15.46.33.33.8
Taxes
1.910.320.446.6101.680.151.435.2
NetIncome
24.728.338.296.2198.2159.4107.364.7
 
*Allrevenuegrossrevenue,operatingincomenetsoutintersegmentsales
LowCost?
TheeasiestwaytoestablishifabusinessisreallylowcostistodowhatIdidinrunningareallifeexperiment.Icreatedacreditbubblethatcausedexplosivegrowthinthehousingindustryandtheoveralleconomy.IwantedtoseethesubsequentbustthatwouldfollowinordertoestablishifEaglewasreallyalowcostproducerliketheyboast.Everythingseemstobegoingaccordingtoplan.Whentimesaregood,commodityproducersdowellwithfewexceptions.Whentimesarebad,youcanseewhohasbeenswimmingnakedoratleastwithfloatiesforthosewhoarenowgettingpulledunderbydebt.ThecaseforEaglebeingalowcostproducercanbemadebypointingtotheircurrentprofitabilityinthefaceofcompetitorslosingmoney,aswellassuperiorhistoricalmargins.AcloserlookatEagleandseveralcompetitorsprovidessupportingevidencethatEagleisalowcostproducer,betterrun,theleastindebtedoracombinationofallthree.Whilenotaninherentlyenduringcompetitiveadvantage,thereisaslightstructuraladvantagetobeingabletoadheretosuchamentality.EagleMaterialsispredominantlyfocusedonwallboardandcementwithasmallaggregateandconcretedivision.Diversificationincommoditybusinessesisoflittlevaluewhentheyaremoreorlessallcorrelatedwitheconomicactivity.Fordifferentsegments,itspublicpeersincludeLafarge,Cemex,TexasIndustries,MartinMarietta,VulcanMaterials,andUSG.Eaglehasmuchlowerleveragethanpeersandhasremainedprofitablewithoutexceptionoverthepastseveralyears.Hasanyoneeverclaimedtobethehigh-costmanufacturer?ItisironicthatCEOs/scionsofcapitalismarefailingtofollowinLenin’slazycommunistfootsteps,“Alietoldoftenenoughbecomesthetruth.”Thereisreallynosuchthingasaveryenduringadvantageintheseindustriessinceplantsarealwaysbecomingalittlemoreefficientfromvarioussources.Probablythemostenduringadvantageisnonstupidity,whichEagleseemstohavethemostofjudgingbytheleveragedeemedacceptableforacyclicalcommodityindustry.
Cement
Eagle’scementbusinessiscurrentlyprofitable.Eagle’sBuda,TXplantisalargecementplantlocatedinaveryattractivemarketforareflexivereason.Energyrelatedcementisin
ClinkerCapacityMshorttons
Cement
201120061998%increase1998-2011Buda,TX1,3001,3001,08020%LaSalle,IL1,00064057574%Laramie,WY6506406303%Fernley,NV5055054805%Gross3,4553,0852,76525%Net2,8052,4351,93845%
 
highdemand,andenergyiscreatingjobsthatspurtheTexaseconomyoverall.Thissomewhatobscurestheclaimof“lowcost”butitisprofitable,asistheentiresegment.I’llcoveritshortly,butexcessiveskepticismisinvalidatedwhenlookingatacompetitorwithhugeTexasexposure.Thecementsegmentsourcesitsfeedstock–limestone–internallyatallplants.Allofthecementplantsarelocatedincloseproximitytorawmaterialsources.Thiscutsoutamiddlemanandadditionaltransportationcosts.Theyallhaverailaccesstoexpandtheirmarketradiustodistributionterminalslocatedinothermarkets.The2largestplants(TXandIL)aremodernandefficient.ThesearesmallcumulativeadvantagesthatEaglewouldpointtoaskeepingthemasthelowcostprovider.Idon’tbelievethereissuchathingasanenduringcompetitiveadvantageintheindustrysinceanyonecanupgradeaplant.Thecementsegmentisinbettershapethanthewallboardunit.Supply/demandcharacteristicsarelessvolatilethanthewallboardindustryandmorefavorableduetoanetshortageofdomesticcementcapacitytomeetdemandinstrongeconomictimes.TheBuda,TXplantis50%ownedinaJVwithHeidlebergCement.Whileoriginallybuiltin1983,itisstillefficientbymodernstandards.Allofthisessentiallymeansthatitisrelativelyenergyefficientcomparedtooldercapacity.ThedrymanufacturingprocessutilizedbyallofEagle’splantsusesmuchlessenergythanthewetprocesssincewaterchangestemperatureataslowerratethanair,ergolongerexposuretoaheatsourceforthesamedegreechangeintemperatureandhigherenergycosts.Wetkilncapacityislikelytocomeofflinethelongerthedownturnlastsorbeupgradedtoadrykiln.Thenumerousstagesandpreheater/pre-calcinersaddtotheefficiencyoftheplants.TheBudaplanthasbeenveryprofitable($24mpretaxtothecompanyin2011)duetothecombinedeffectsofcompanyowneddistributionterminalsensuringaccesstocustomers,astrongTexaseconomy,andsellingoilwellgradecement.Eaglebreaksoutthespecificfinancialsforthisplant.Thereis$61minequityandnodebtatthesubsidiarylevel.Fullytaxed,theplantearned$30min2011or$15mforthecompany,adecent50%ROE.EagledidnotbreakoutTexasLehigh(thenameoftheBudaplant)until2008,soresultsonlygobackto2006.It’saprettysteadyearner.
$,million20102009200820072006Revenue141133189177137Pretax4750686766Eagle'sShare23.5253433.533
TheBudaplanthasaccesstonumerousdistributionterminalsaroundTexas.AsitpertainstotheTexasplantandallofEagle’splants,adistributionterminalisavaluableassetintertwinedwiththeoverallprofitabilityofthecementoperations.Itgivesguaranteedaccesstoenduserswithoutthemiddleman.In2006Eagle’sTexasJVpaid$24.5millionfora15%interestinHoustonCementCompany,whichoperatestwoterminalsinHouston,TexasallowingEagletosellupto495,000tonsfromtheterminalseachyear.Whilecompetitorshavedistributionfacilitiesaswell,thistransactionhighlightstheirvalueinthechain.

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