Now that cement dust has cleared from yesterday's earnings announcement, it appears that Texas Industries (NYSE:TXI) turned in a fine second fiscal quarter.
As my Foolish colleague Rich Duprey indicated the day before the maker of cement, building materials, and other products released its quarterly results, those results were expected to include revenues of about $252 million for the quarter, resulting in per-share earnings of about $0.55 -- a level that would have represented an 11% gain over the previous year. Instead, while revenues were slightly lower than expectations, coming in at $245.8 million, the company was able to get many of its cost ducks -- including energy charges -- in a row, such that diluted per-share earnings spiked from the $0.26 last year to $0.62 for the quarter. On top of that, it also recorded an after-tax gain of $0.47 per share from the settlement of a long-standing U.S. anti-dumping order on Mexican cement, raising the reported bottom-line figure to $1.09 per share.
In announcing the company's results, CEO Mel Brekhus called construction activity in Texas, the company's largest market, solid. He also noted that while residential construction activity has declined in California, where Texas Industries also operates a couple of cement plants, highway construction and other public works has remained strong.
What, then, is going on here? The vaunted housing bubble has burst, residential construction is -- as management was careful to note -- lower than in past years, both in California and throughout much of the rest of the nation. And yet, here's one of the few remaining domestic cement producers checking in with solid quarterly results. The answer, as I see it, is that cement is substantially less tied to residential construction than generally is perceived.
If I recall my relative numbers correctly from the days when I was an analyst covering Texas Industries and several other domestic cement producers, including Eagle Materials (NYSE:EXP) and predecessors of Cemex (NYSE:CX), fully half of U.S. cement consumption is tied to roads, highways, and other public works. Another 20% goes for non-residential construction, which generally has remained robust, and a similar share is used in homebuilding. The final 10% or so is applied to oil well cement and other specialty applications. The largest user -- road and highway construction -- has been buoyed in the U.S. for a couple of decades by a series of federal highway bills, the latest of which was passed in 2005 and will result in about $285 billion in highway-related expenditures over the next half-dozen years.
And so in comes Texas Industries, almost below the proverbial radar screen, with its solid numbers. The company, which owns two cement plants each in Texas and California, sports a forward price/earnings ratio of just under 16, obviously at the higher end of its historic levels, but its five-year expected PEG ratio (the P/E ratio divided by the anticipated growth rate) is an attractive 0.63. And the farther below 1.0 a company falls, the more attractive its shares become.
For a number of reasons, including its singular ties to cement following its spinoff two years ago of Chaparral Steel (NASDAQ:CHAP), along with the usage fundamentals described above, I'd urge Foolish investors to keep an eye on Texas Industries.
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Fool contributor David Lee Smith owns no shares in any of the companies mentioned. He welcomes your comments or questions.
