One of the benefits of a worldwide cement shortage is that, if you happen to be in the cement-selling business, you can control pricing to your advantage. That's exactly what's happening over at Florida Rock (NYSE:FRK), which provides cement, concrete, and other aggregates for building and construction. The stock has been on a tear lately, leaving investors to wonder how long the good times will last.
With demand outstripping supply, partly because of the housing boom but also because of the cleanup after last year's hurricanes, Florida Rock was able to boost its net income by 26% in the first quarter compared with the same period last year (after backing out a hefty real estate gain from last year's results).
How much power does the company have over pricing? Well, product sale volumes across all segments barely budged, yet quarterly operating profit skyrocketed 70% in the concrete segment and 23.2% in the cement segment. That's pricing power. It also leads to higher margins. Operating margins for concrete grew to 13.6% from 9.4%. That means concrete's profitability is almost 50% higher this year than last. Most companies would kill to have that kind of margin increase. Cement is doing just fine also. Margins there popped from 21.2% to 23.9%. Investors like what's going on here, having bid the stock up 12% over the past few weeks.
So what upsets the wheelbarrow? With a forward price-to-earnings ratio of 17 and analysts expecting earnings growth of 17% for the year, the company might seem close to fairly valued. Sooner or later, though not in the foreseeable future, the supply/demand imbalance will correct itself. Keep in mind that whatever value investors are placing on the company now may or may not reflect this reality.
Florida Rock may be a fine company, but its demand windfall is likely temporary. And powerful competition from the likes of Lafarge North America (NYSE:LAF) and Martin Marietta (NYSE:MLM) is not insignificant. When the demand situation corrects itself, investors may find themselves weighed down by cement.
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Fool contributor Lawrence Meyers writes opinion articles, so you should never buy or sell any stock based on what he says. Don't be a fool: Do your own homework.
