Boring Portfolio Boring Buys TXI
January 29, 1996

Texas Industries (NYSE:TXI)
1341 W. Mockingbird Ln, Dallas, TX 19090
Phone: (214) 647-6700
Closing Price, January 26, 1996: $53 (up 1/2)

Trade: Buy 100 shares, January 29, 1996


Dallas-based Texas Industries (NYSE: TXI) has done an outstanding job the past few years of turning rocks and scrap steel into hard cash. The company's share price grew 68% over the past 12 months and nearly tripled over the past five years, far outpacing its peer group.

Texas Industries has two divisions: steel and cement/concrete. The former consists of TXI's 82% stake in Chaparral Steel, an efficient minimill operation that turns scrap steel into beams, re-bar, and other products for construction and industry. The cement/concrete division historically produced around 35% of total revenues and the majority of profits, but that picture is changing as prices and margins for steel beams have begun to improve.

The fortunes of both divisions are tied to swings in construction activity in Texas and neighboring states. After a period of stagnancy, that activity has picked up noticeably, particularly in commercial construction. TXI also receives a small but growing income stream from real estate investments.


The cement/concrete division operates primarily in Texas and Louisiana, supplying materials such as aggregate, cement, gravel, ready-mix concrete, and sand. TXI's cement plant in Midlothian, Texas, is the largest in the state, with estimated limestone reserves of at least 100 years. TXI's cement plants produced approximately 2.1 million tons of finished cement in 1995, 2.0 million tons in 1994 and 1.7 million tons in 1993. Altogether, TXI owns or leases some 50,000 acres of mineral-bearing land.

Below-cost Mexican imports kept cement prices depressed in the company's market area in the 1980s. Tariffs that will remain in force through the turn of the century have corrected that situation, however. Cement prices rose during 1995, and TXI announced a $5 per ton price increase effective January 1, 1996, that appears to be sticking, according to the company.

TXI's cement operations are currently running at full capacity, as are most cement production facilities nationally. According to the company, supply and demand are in balance at price levels that provide healthy profit margins. For the second quarter of FY96 (ending November 30, 1995), the company reported operating profits from cement, aggregate and concrete operations of $21.9 million, up 33% from a year ago. Volume and price improvements for all major products resulted in a 19% increase in revenues for the segment, to $89.3 million. With higher prices and steady demand, the prospects for earnings growth in 1996 are very good.


TXI owns 82% of Chaparral Steel, which is a minimill that produces steel construction beams, rebar, and other steel products from scrap steel. Chaparral meets a major portion of its shredded steel requirements from its own shredder operation. The company has two electric-arc furnaces plus a steel rolling operation. Recent capital improvements have made Chaparral a leading producer of wide-flange beams used in commercial construction. Over the past few years, output has gradually risen from approximately 1.4 million tons of finished products to an estimated 1.6 million tons for the FY ending May 1996.

Just under half of Chaparral's products are sold in Texas, Oklahoma, Louisiana and Arkansas. According to the company, NAFTA "may continue to favorably affect the Company's position as a supplier of certain steel products in the Canadian and Mexican markets." Export sales accounted for 7% of 1995 shipments. At present, Chaparral has approximately 1,100 customers, no one of which accounted for more than 10% of the Company's products sold in 1995.

As do all minimills, Chaparral's operations generate electric arc furnace (EAF) dust that is hazardous waste according to EPA standards. Chaparral contracts with reclamation facilities in the US and Mexico that receive the EAF dust and recover the metals from it for reuse, thus rendering the dust non-hazardous. "In addition, the Company is continually investigating alternative reclamation technologies and has implemented processes for diminishing the amount of EAF dust generated."

Chaparral appears on Robert Levering's list of "100 Best Companies to Work for in America," owing to the significant attention the company pays to employee education and training. As part of that training, each employee learns all phases of the business, from mill operation to marketing and sales.

During the second quarter of FY96, operating profit for Chaparral Steel increased 81% over the year-ago period, to $19.9 million, on sales of $155 million, a 23% increase. Shipments and average realized prices were up 10%. The company reported that "the strong market for structural steel beams, Chaparral's primary product line, is continuing into 1996."


Texas Industries is also increasingly active in real estate, including development of land acquired for industrial, office, and multi-use parks in the metropolitan areas of Dallas/Fort Worth and Houston, TX and Richmond, VA. The company may also sell some of its surplus real estate in 1996. In the most recent quarter (2Q of FY95), property sales generated $4.9 million in pretax income. The company noted that real estate activity has become an increasingly important component of the company's operations and one that provides a meaningful, recurring contribution to earnings.


Texas Industries made $3.88/share for the fiscal year ending May 1995, up 69% over the preceding year's $2.29. Revenues for FY95 were $716 million, a 15% increase.

The company easily beat Street earnings estimates over the first two quarters of the current fiscal year, and analysts' estimates for FY 1996 (ending May) have risen steadily, to $6.20 currently (range of three analysts is $5.80 to $6.89, according to First Call). Current estimate for 3Q FY96 is $1.38; that earnings report should appear sometime during the week of March 18.

Texas Industries has paid down debt over the past few years. Operations have generated sufficient free cash to enable to company to buy back approximately 10% of its common shares, double its quarterly dividend, and expand its cement/concrete and steel operations through acquisitions and capital improvements.

TXI has approximately 11.3 million common shares outstanding. Average daily volume is 30,000 shares. Insiders own approximately 5%. Institutions own approximately 65% (N=105); as of August 1995, Fidelity owned 11.9%, Dietch & Field, 7.4%, and Trimark Investment (Canada), 6.8%.

Investors Business Daily:  EPS rank = 75
                           Relative Strength = 80
Value Line:                Timeliness = 1, Safety = 3
S&P Rating:                4 Stars (Accumulate)

Price :                    51
52-week range :            Low = 30 1/8 (1/17/95)
                           High = 55 1/4 (11/27/1995)
Trailing P/E :             9.4
Yield :                    0.8%
Beta :                     .61
5-Year EPS growth rate:    NMF (deficit in 1991)
Industry growth rate:      11%

Key ratios (based on FY1995)

Price/Book :            1.64     
Cash flow  :            $7.83/share      
LT Debt/equity :        54%       
Return on equity :      13.8%  
Current ratio :         2.8
Quick ratio :           1.6

Profit/Loss Summary
                FY96(E)  FY95    FY94    FY93    FY92
Sales (MM)      921.84  830.50  707.10  614.30  601.10
Income (MM)      70.06   48.00   25.80    1.10    1.90
EPS               6.20*   3.88    2.29    0.11    0.19
Net Profit
 Margin (%) 7.6   5.8     3.6     0.2     0.3

Quarterly Results 3Q1995(E) 2Q1995 1Q1995 4Q1994   
EPS                1.38*     1.89   1.53   1.56   
Dividend Per Share  .10      0.10   0.10   0.10   

Quarterly Results 3Q1994 2Q1994 1Q1994 4Q1993   
EPS                 .55   0.96   0.85   1.33   
Dividend Per Share  .10   0.05   0.05   0.05   
*Source: First Call, 1/15/96

Balance Sheet ($Mil)
                        1995  1994  1993  1992
  Cash & Equivalents     26    32    33    21
  Total Current Assets  293   277   261   240
  Total Assets          753   749   757   777

  Current Liabilities   105   116   101   105
  Long Term Debt        305   281   374   389
  Preferred Stock         1     1     1     1
Shareholders Equity     342   352   282   281


Texas Industries demonstrated impressive sales and earnings growth throughout 1995, and the company's sound internal operations and a reasonably favorable business environment indicate good potential for continued growth in 1996. Although the valuation multiple for the stock may grow a bit during 1996, share price appreciation will be driven largely by earnings gains and possible dividend increases. At a multiple of 9.5-times trailing earnings, TXI should approach $60 by mid-year--a 17% increase from its current price level (plus dividend).

-- Gregory Markus (MF Boring)