Chalk up another excellent handicapping of pre-earnings numbers by Foolish contributor Rich Smith. He correctly warned that a hint of weakness in cement demand at Lafarge North America (NYSE:LAF) would yield an unpleasant surprise. Well, the stock closed down 5.6% on news that demand was weak in some markets.
So is it time to run from this cement maker -- or would it be smarter to buy up the shares at today's discounted prices?
If you just read the top-line, second-quarter results, you might wonder why there was such a fuss this morning on Wall Street. Revenue, compared to the year-ago quarter, was up 12%. Heck, remove the favorable Canadian exchange rate, and revenue was still up 8%.
The bottom line showed a different story. Exclude a one-time legal settlement during the same period last year, and net income increased a lighter-than-expected 3%. Analysts were looking for $2.58 per share; the company delivered $2.17. But if you were to net out the effect of last year's litigation, income per fully diluted share decreased by a penny, because the company increased the number of shares outstanding. Maybe that's why the company announced a $100 million share repurchase program.
Factors that held back income included increased production costs (read: high energy prices), the impact of Hurricane Katrina, and softness in several markets that led to reduced cement-plant production.
Look at the details and the results weren't so bad. There was an 11% decrease in ready-mix concrete caused by temporary losses associated with Hurricane Katrina and a cement shortage on the West Coast. U.S. and Canadian cement volume was down 4% following strong growth in 2004 and the first half of 2005. An 11% increase in the average price of cement helped to save the day.
The company points out that demand for cement in October was up compared to the same period last year -- although last year's strong fourth quarter may be hard to beat on a volume basis. Where results and especially margins are concerned, pricing power has been responsible for sending cement stocks higher. Lafarge has already announced 2006 price hikes.
Analysts expect the company to earn $5.26 in 2006 -- giving the stock a forward price-to-earnings (P/E) ratio of 10.8. That looks cheap if you compare it to Florida Rock (NYSE:FRK),Vulcan Materials (NYSE:VMC), or CRH (NASDAQ:CRHCY). They trade at 21.1, 17.9, and 11.2 times forward earnings, respectively. But those looking for low multiples will find that Mexican cement giant Cemex (NYSE:CX) -- No.1 in U.S. market share -- trades at 9.6 times forward earnings and is debt-free.
Lafarge is up approximately 20% over the last 52 weeks. Still, based on valuation, I see no compelling reason to buy this stock. Companies have enjoyed robust demand from a volume standpoint in conjunction with a strong pricing environment, both contributing to the stock's recent strength.
But a dose of inflation won't do much good for margins, if it manifests in a meaningful way. When the cyclical downturn comes in construction (as it always does), today's strong materials prices will be nothing but a memory.
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Fool contributor W.D. Crotty does not own any shares in the companies mentioned. Click here to see The Motley Fool's disclosure policy.
