Shares of Eagle Materials (EXP -1.03%) jumped 14.96% on Friday, following a report that an activist firm had built a stake in the rock and mineral producer and intends to push for a breakup and potential sale of the company.
New York hedge fund Sachem Head Capital Management has built a 9% stake in Eagle Materials ahead of a push for divestitures, according to a Bloomberg report. Sachem reportedly wants Eagle to consider divesting its frac-sand business, believing that the unit, which is tied to the oil and gas industry, has depressed Eagle's valuation in recent years.
Sachem Head would also like the company to seek buyers for its cement and wallboard units, which have been better performers. The activist further believes that given Eagle's pristine balance sheet, it is well-positioned to use borrowings to fund an expanded share buyback.
Eagle Materials has been an underperformer of late. The company's shares were down nearly 30% over the past year before the activist report, and the company in January reported fiscal third-quarter results that were down year over year.
Check out the latest earnings call transcript for Eagle Materials.
Eagle Materials management in January was optimistic that after a calendar 2018 that was plagued by one-off items including unusual weather and a shift in the timing of wallboard price increases, calendar 2019 was poised for improvement. Investors seemed intrigued, with the stock up nearly 20% year to date even before word of Sachem Head's potential involvement was made public.
Activists have had mixed success in getting companies to follow their advice but given Sachem Head's wide range of suggestions and the stock's positive reaction to the report Eagle Materials management is going to be under pressure to either come to the table and discuss the recommendations or quickly generate results on their own. One way or another, Eagle Materials investors have reason to hope the worst is now in the past for the shares.