I've gotten myself in trouble with corporate PR folks for saying this, but it's true: I love boring companies in slow and no-growth industries. Vulcan Materials (NYSE:VMC) didn't much like my calling it "boring" back in February, but really, guys -- I meant it as a compliment. After all, uber-investor Peter Lynch wrote in One Up On Wall Street that he often finds great investment ideas by scanning the ranks of companies that do "something boring," that do it in a "no-growth industry" and, if at all possible, that confine their business endeavors to mining a "rock pit."
But enough explaining. Today's nominee for the most boring company of the year: Lafarge North America (NYSE:LAF), scion of one of the world leaders in the construction materials industry, France's Lafarge (NYSE:LR). Lafarge North America (let's just call it "Lafarge" for now) is in the rock business. All kinds of rocks, but mainly really tiny rocks that have been knocked into even tinier pieces and then squished back together: cement, concrete, gypsum wallboard, asphalt, and the always enigmatic "aggregates."
Lafarge reported earnings yesterday, and at first glance, the company seems to be growing considerably faster than the speed of cement drying. Diluted earnings from continuing operations (Lafarge sold a Florida subsidiary last year) for the quarter just ended jumped nearly 40%. Sales rose 15% year-on-year, helped by the strengthening U.S. economy and continued boom in residential housing construction. Confident in its future, Lafarge raised its dividend 10% and continued to buy back shares.
That's the good news. Here's what looks bad. As we have seen before with other companies that issue new, dilutive shares while buying back old ones -- DoubleClick (NASDAQ:DCLK) and Symantec (NASDAQ:SYMC), listen up -- Lafarge's average basic share count rose 1.5% year-on-year despite the share buybacks. On valuation, while Lafarge looks pretty cheap at a forward P/E of just 11, its enterprise value-to-free cash flow ratio is a hefty 26; given its 10% long-term projected growth rate, that seems a bit pricey.
And speaking of long-term, over the past few years, Lafarge's business has been on the rocks. From 2000 through 2003, cash from operations declined 17%. Long-term debt increased 4%. Sales increased 19%, while profits fell 16%.
In sum, Lafarge turned in quite a good quarter yesterday. However, it still has work to do if it's to pull itself out of the hole it's dug over the past few years.
Fool contributor Rich Smith owns no shares in any company mentioned in this article.
