In April 2022, I believed that shares of Eagle Materials (NYSE:EXP) were cementing a floor, as it benefited from the recovery post the pandemic. However, 2022 was set to become tougher amidst higher interest rates, higher inflation, and related to that concerns on the housing market, although valuations started to look quite compelling at the time.
With the outlook in the spring of 2022 looking a bit darker, Eagle turned out to post record sales and profits in 2022, with operating momentum still continuing today, triggering a huge recovery in the shares, for the right reasons. While the current valuations remain attractive based on current earnings, I remain constructive but see no reason to alter a minimal long position here.
Diversified Building Materials
Eagle Materials is a diversified building materials producer. The core of the business is that of a low-cost cement producer, while it produces other and adjacent materials like slag, frac sands and ashes, used in infrastructure markets. This is complemented by gypsum, wallboard and paperboard, used in residential and commercial markets, as this so-called light materials business is a bit smaller than the heavy materials business, although a bit more profitable. This dual positioning makes the company a dual play on the US housing market and on greater infrastructure spending.
Pre-pandemic this was a $90 stock, which was unleashed by the pandemic as shares rose to highs of $170 in 2021, before selling off to $125 in April 2022. In its fiscal year 2020 (which ended in March of that year), the company posted a 4% increase in sales to $1.5 billion on which EBITDA of $471 million was reported, for earnings of $5.57 per share, with those earnings numbers being quite stable for a couple of years.
2021 sales rose by 16% to $1.6 billion, with EBITDA up to $571 million, and earnings coming in at $7.99 per share. Moreover, the company divested the oil & gas business (a small and loss-making operation) while it announced its intention to split up the core cements and gypsum operations.
With the company having posted the results for the first three quarters of 2022 in April of last year, the company was on track to post annual sales of $1.8 billion, and EBITDA of around $600 million, all while net debt was manageable at $820 million. Earnings were on track to surpass the $8 per share mark, in fact, I saw them coming in close to $9 per share.
With a 13-14 times earnings multiple and leverage being modest, the valuation looked quite compelling, even as the company cancelled its plans to separate the light and heavy materials business (i.e., the cement and gypsum business). There were some dark clouds on the horizon however, due to higher interest rates which left me to conclude to start buying once the $100 mark came into sight, as I initiated a minimal position at $105.
Coming To Life Again
A mere $100 stock a year ago has seen real momentum as shares peaked in the $190s in July, with shares now trading at $176 per share at the moment of writing.
Last year, the company eventually posted 2022 sales at $1.86 billion, producing a $9.23 per share earnings number, which topped my estimates as well. Adjusted EBITDA improved to $657 million, although net debt ticked up to $930 million, for a 1.4 times leverage ratio.
In May, Eagle announced that it has acquired Martin Marietta’s cement import and distribution business in North Carolina, including a Stockton terminal, although no financial details on the deal were announced. By the middle of the month, the company announced 2023 revenues of $2.15 billion, split pretty evenly between a $1.17 billion heavy materials business and $0.98 billion light materials business (with the latter being more profitable).
GAAP earnings came in at $461 million, equal to $12.46 per share, marking another very strong year, despite a tougher, uncertain, and inflationary environment. Net debt ticked up to $1.08 billion, although leverage remained intact at 1.4 times with EBITDA having improved to $782 million.
Despite the very strong 2023 results, the company maintained operating momentum in the first quarter of fiscal 2024, with sales up 7% to $601 million, and first quarter operating earnings up 17% to $167 million, marking very strong margins. Despite rising interest expenses, in part due to higher debt on the back of share buybacks, the company grew earnings per share by more than 23% to $3.40 per share, following a substantial decline in the outstanding share base, with adjusted earnings even coming in fifteen cents higher.
This continued momentum is notably driven by heavy materials (notably cement) on the top line, while light materials posted softer sales trends, although they remain vastly superior in terms of margins. Net debt ticked up to $1.11 billion, due to buybacks, although a $812 million trailing EBITDA number means leverage ratios are stable at 1.4 times. Quite frankly, I do not want to see higher leverage ratios as operating profits are superior compared to historical periods, meaning a reversal on the bottom line could push up leverage here.
If sales revert to a $2 billion number and margins retreat towards historical margins of around 20%, EBITDA numbers might fall back towards a number closer to $600 million, pushing up leverage ratios to a still manageable 2 times EBITDA.
With earnings power now trending closer to $15 per share, the margin performance has been far stronger than I believed was realistically possible in spring 2022. This made the $100 dips last year an obvious buying opportunity and while the company only trades at 12 times earnings here, the issue is that we likely observe above-average revenues and margins from a historical perspective.
What Now?
Having bought a small position with the benefit of hindsight, I feel no urge to either sell out of this position at $175 here or to add to the position given the discussion above.
The near-term outlook for the business remains sound and despite the higher interest rates, the housing market is more resilient than many have feared as long-term infrastructure trends remain intact. This is all very positive, setting long-term investors up for decent returns, as execution remains good.
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