Materials Pile With Sunburst

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Diversified materials maker Eagle Materials (NYSE:EXP) is coming off a strong showing in fiscal 2016. Revenue was up 7% to $1.1 billion, while cash flow and earnings increased 14% and 18%, respectively, despite some headwinds from the oil and gas market. Investors hoping that momentum continues in fiscal 2017 will get their first data point on July 25, when it reports its fiscal first-quarter results. Here are three things to watch in that report.

1. Are cement volumes still growing?

Last quarter, Eagle Materials' cement segment delivered record operating earnings of $21.8 million, which was up 4% from the year-ago quarter. Meanwhile, volumes were up 6% to 879,000 tons while the average sale prices of $100.41 per ton was a slight improvement year over year. This solid performance came despite the fact that cement sales to the oil and gas market for oil wells are down 80% over the past two years due to the slowdown in drilling activities. To offset this deceleration, the company reallocated those volumes to construction customers.

That trend needs to continue given that the oil market remains in the dumps. In fact, the U.S. rig count slumped another 23% last quarter, suggesting that cement sales to the sector will remain weak.

2. Did pre-buying impact gypsum wallboard sales?

Eagle Materials noted that gypsum wallboard sales benefited from pre-buying last quarter after customers stocked up before the company's price increase at the end of March. Overall, gypsum wallboard sales volumes jumped 36% when compared to the year-ago quarter, driving a 34% increase in fourth-quarter operating earnings for the gypsum wallboard and paperboard segment.

Because of the impact of pre-buying, investors should look for any negative impact on sales volumes. That said, potential for continued momentum certainly is there, especially based on comments from rival USG (NYSE:USG). The gypsum maker also saw an uptick in wallboard sales last quarter, with volumes increasing 20%, due in part to its planned price increase in March. Because of that, USG CEO Jim Metcalf warned on its conference call that "we don't project volume continuing to grow at this rate for the full year." However, he did note that demand in all of their markets would be stronger than originally planned. He added, "I am encouraged that roughly three weeks into April, wallboard volumes have continued to outpace the prior-year." Those encouraging initial sales suggest that Eagle Materials' gypsum segment could deliver better-than-expected results.

3. Is the oil and gas proppant segment still under pressure?

While the oil market downturn is having limited impact on Eagle Materials' cement business, the same can't be said for its proppant business. Last quarter, revenue slumped 29% due to the significant decline in oil and gas activity, which caused frack sand volumes to fall 4% over the prior quarter.

That pressure likely continued during the first quarter. Proppant-producing peer Fairmount Santrol (NYSE:FMSA), for example, recently reported disappointing preliminary results. Fairmount Santrol noted that proppant volumes dropped to a range of 1.9 million to 2 million, which was below the 2.1 million tons it sold in the prior quarter. Furthermore, Fairmount Santrol warned that it was facing pressure on both price and volumes, which led it to pre-announce revenue and earnings that were significantly below analysts' expectations. This suggests that Eagle Materials' proppant business likely did not turn the corner last quarter. 

Investor takeaway

Eagle Materials is coming off a banner year, despite significant headwinds from the oil and gas sector. Its diversified approach enabled it to shift its focus to stronger segments. Its ability to maintain that momentum is the key to getting its fiscal 2017 off to a strong start.

 

Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Eagle Materials. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.