I know, I know: Centex (NYSE:CTX) and Toll Brothers (NYSE:TOL), the two most likely homebuilders to rise from their share-price troughs first, are still mired in the doldrums. You may well have an itch to begin building a position in one or both.
I can't encourage you to scratch that itch. As I've written recently, even with an extended investment time horizon, you still chance investing too early. However, I will suggest a pair of stocks that can provide you with a modicum of current downside protection, while allowing you some benefit from housing's eventual recovery.
Let's pour the foundation
Since both firms are cement companies -- at least in part -- let's begin with a brief primer on the cement business in the U.S. It's a business with substantial demand underpinnings, almost regardless of the economy's vibrancy, and a shortfall in domestic productive capacity.
The U.S. cement industry includes about 115 cement plants, located in 36 states, which can produce more than 90 million metric tons annually. Since we Americans consume something more than 120 million tons of cement each year, the rest of our supply gets imported from places like China, Canada, Thailand, and Greece. And while U.S. capacity is being increased through expansions to current plants, total capacity is unlikely to catch up with demand anytime soon.
But lest you're concerned about the effect of housing's retrenchment on cement demand, in reality, only about 20% to 25% of total U.S. cement is used in houses. The rest goes toward public works, commercial construction, and other applications such as the cementing of oil wells. Domestic demand for about the past 20 years has been bolstered by a series of highway spending bills. The most recent, passed in 2005, calls for roughly $286.5 billion in expenditures for roads, bridges, and other public works projects over a half-dozen years.
About three decades ago -- and to the surprise of most in the U.S. cement industry -- overseas cement producers began buying North American cement capacity. Today the Portland Cement Association estimates that about four of every five tons of U.S. capacity is owned by overseas producers.
A solid pair
I think two companies in particular can benefit from the ongoing strength of cement, and profit from a turn in the housing market when it occurs: Mexico-based cement producer Cemex (NYSE:CX) and its Dallas-based counterpart Texas Industries (NYSE:TXI).
Cemex, a recommendation of both Stock Advisor and Global Gains, is the world's third-largest cement producer, behind France's Lafarge (NYSE:LR) and Switzerland's Holcim (OTC BB: HCMLF). Cemex produces cement virtually around the world, including in the Americas, Europe, Africa, the Middle East, and Asia.
Over time, the company has grown steadily through acquisition. Two of its more noteworthy purchases were Southdown -- the largest of the U.S.-based producers when Cemex bought it in the early years of this decade -- and Rinker, an Australian-based producer, which derives most of its revenues and earnings are generated in the United States. Cemex acquired Rinker for $15.3 billion this year.
Given our housing morass, it's important to note that in its most recent quarter, Cemex saw its sales increase everywhere but in the U.S. Its international reach gives the company an element of downside protection from the effects of a softening U.S. economy.
Sunshine strength
But the key to Cemex's ability to ride a strengthening housing market results partly from the Rinker purchase, and how it doubled the importance of Florida to the company's overall U.S. operations. Once it completes an expansion of one of its three Florida plants, Cemex will account for roughly 40% of the state's total cement capacity.
In the meantime, Cemex trades at a forward P/E multiple around nine, and boasts an extremely strong balance sheet. The company has consistently returned cash to shareholders, with a five-year average dividend yield of approximately 3.1%.
Big in a big state
In contrast to Cemex's global presence, Texas Industries is one of the few remaining publicly held U.S. cement manufacturers. Roughly 85% of the company's pre-tax operating profit comes from the cement business. The company is the largest producer in Texas and one of the largest in California. It operates four cement plants, two each in the two states, although one of the Southern California plants is quite small. The company's aggregates operations occur in California and in much of Texas and Louisiana.
For a number of years, Texas Industries' operations included a steelmaking operation, Chaparral Steel (NASDAQ:CHAP), which was spun off two years ago at $12.50 a share. It now is being acquired at $86 a share by Gerdau Ameristeel (NYSE:GNA). This brings me to yet another reason to like Texas Industries: With most of the United States' domestic cement production owned by foreign companies, this company's geographic concentrations might make it an extremely attractive acquisition opportunity, especially now that it's divested its steelmaking arm.
While we await that possibility, Texas Industries is heading for daily cement capacity of about 7.5 million tons in its two key states. It trades at a forward P/E multiple of around 15 times. Texas Industries boasts strong management, and over the past five years, it's dished out an average 0.8% dividend yield to its shareholders. That's hardly a massive payout, but it makes a nice cherry atop this pardicular sludgy concrete sundae.
So if that itch to invest in something tied to housing just won't ease up, consider these two companies as safer scratching scenarios.
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Fool contributor David Lee Smith doesn't own shares in any of the companies mentioned in this article. He welcomes your emails. The Motley Fool operates under a strict disclosure policy.
