Eagle Materials participated in Southwestern Showcase 2007, an annual investor conference held in Dallas during November. Check here for a list of other firms; most provided recordings of their presentations. I'll be providing a recap of events I attended; check The Motley Fool's daily headlines for updates.
"Built to Last" was the theme Eagle Materials (NYSE:EXP) hoped to drive home to investors as it kicked off Southwestern Showcase. The theme makes sense when you understand that Eagle produces cement and gypsum wallboard. It is operating in the eye of the residential housing tempest that's circling over many U.S. markets.
I believe Eagle will be able to withstand industry turmoil. I have been covering it since hearing its management speak at last year's event. Unfortunately, my investment in the company hasn't done well, but the presentation at the conference gave me enough confidence to stick through current challenges.
Eagle's two primary businesses
First and foremost, Eagle billed itself as a "low-cost producer of cement and wallboard" that helped keep net profit margins at 16.5% for the most recent fiscal second quarter. Staying solidly profitable is definitely an impressive feat seeing as gypsum wallboard demand is plummeting; Eagle's gypsum sales fell about 35% for the quarter.
Fortunately for investors, wallboard represents only about 40% of total sales, and most of the rest are from cement. It's little wonder that pure gypsum operators are faring much worse in the current environment: Market leader USG (NYSE:USG) shares have fallen almost 30% over the past year, versus about a 15% fall for Eagle. Eagles estimates its domestic market share at 8%, qualifying it for fifth largest in the space.
Eagle's stock chart more closely resembles that of cement leader Cemex (NYSE:CX), which is also down about 15% over the past year. Cement demand is holding up much better than gypsum largely because commercial construction trends remain strong. Eagle posted positive cement sales growth for the third quarter and sees "favorable growth dynamics" as public-works construction is expected to remain strong.
Management also estimates that 20% of U.S. demand will be met by imported cement this year, implying there is plenty of room to grow domestic supply sources. No wonder Eagle has "sold out our production capacity for the 21st consecutive year."
Confidence in the future
Speaking of growth, Eagle is in the middle of modernizing certain plants and building new ones. A brand-spanking-new wallboard facility in South Carolina is slated to open by the end of this year, which Eagle estimates will increase its capacity by 30%. The year 2009 will result in the "modernization and expansion" of a cement plant in Nevada and another in Wyoming.
Total approximate costs for these three plants will run $470 million, to be spread over the next couple of years. This signals to me Eagle expects current market challenges to pass -- eventually.
Management estimates that the above initiatives (including a previous project in Illinois) could increase operating earnings from $100 million-$170 million, depending on how the marketplace recovers. To put that in context, Eagle reported just over $300 million in operating earnings last year, implying that these projects could provide a 50% annual boost within a few years.
Taking care of shareholders
And despite recent market turmoil, Eagle estimates its dividend yield of 2.3% is nearly 50% ahead of the industry average. It also pays out only 26% of earnings as dividends, versus 33% for the overall industry. It even boosted its annual dividend by a dime, to $0.80 per share, back in March and bought back 8% of its stock during the most recent quarter.
So far, Eagle has repurchased 25% of its common shares since it was spun off from homebuilder Centex (NYSE:CTX) in 2004.
After seeing Eagle's Southwestern Showcase presentation, I felt more than comfortable holding on to my position. There could easily be more short-term turbulence ahead, but I do see Eagle as a company that's built to last, and it could even thrive once domestic homebuilding begins to stabilize.
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