At first glance, there's not much to dislike about the fiscal Q3 2005 earnings report released yesterday by rock jock Florida Rock (NYSE:FRK). But we're a suspicious lot at the Fool. Amongst all the good news, I think I'll find a yellow flag or two to keep an eye on as well.
Over the first three quarters of fiscal 2005, Florida Rock has continued to ride the wave of the strong U.S. housing market like a hunk of volcano-spewed pumice. With the construction boom still going strong, demand for the company's stock in trade -- cement and concrete for buildings, and aggregates for the roads to reach them -- continues unabated.
In this regard, the company's press release must seem like music to investors' ears: "Demand for cement remains at an all-time high, and most of our facilities are operating near capacity." What's more, the company sees this strong level of demand extending at least through its fiscal fourth quarter. Florida Rock was even able to push through price increases on its products as recently as this month. It doesn't get much better than that.
Year-to-date sales are up 17% over the first nine months of 2004, and gross and net profits both increased at a considerably faster clip, up 28% and 24%, respectively. What's more, the company is putting its windfall cash to excellent use in the service of its shareholders. It's shoring up its balance sheet against the downturn that will one day arrive, paying down its debt load by more than half over just the last three months. The company now has more cash than debt to its name, making it perhaps the soundest player in the market. Florida Rock sports a debt-to-equity ratio that's just a fraction of those carried by competitors Vulcan Materials (NYSE:VMC), Martin Marietta (NYSE:MLM), and Lafarge (NYSE:LAF).
There are, however, two troubling lines that we should highlight in the earnings report: inventories and accounts receivable. Inventories have risen 22% over the past year, considerably faster than sales increased. A/R increases also outpaced the speed of sales gains, up 20% year over year. Mind you, these are just cautionary observations -- the sort of numbers that a risk-averse investor should keep an eye on over several quarters in search of a trend. But I'm guessing that anyone investing in a rock company is not a gambler, not a rocket-stock seeker, and more likely to be risk-averse by nature. It's for you, dear Fool, that we're pointing these items out.
Rock on with further Foolishness:
- Cement Maker Pours It On
- Lafarge Lost in Translation
- Mining Martin Marietta's Results
- Solid Sales for Florida Rock
Fool contributor Rich Smith does not own shares in any company mentioned above.
