2023-06-05 12:02:08 ET
Summary
- Eagle Materials is expected to benefit from strong demand and favorable pricing in the cement segment, as well as increased investment in infrastructure improvement through the IIJA.
- The Wallboard segment should experience growth due to a robust pipeline of multifamily units under construction and an undersupply of homes, with the Federal Reserve's expected less hawkish stance supporting a recovery in the new residential construction market.
- The company's margins are likely to improve due to strong pricing, investments in operational and technology capabilities, and recent acquisitions, making the stock an attractive buy at its current discounted valuation.
Investment Thesis
Eagle Materials ( EXP ) is expected to continue benefiting from favorable pricing driven by strong demand, especially in the cement segment. The company's positive outlook is further supported by increased investment in infrastructure improvement through the IIJA and strategic bolt-on acquisitions. In the upcoming quarters, these factors should provide additional support to the cement segment.
The Wallboard segment, which focuses on residential new construction as well as remodeling and renovation (R&R), is anticipated to benefit from a robust pipeline of multifamily units currently under construction. Additionally, the segment should enjoy a secular tailwind due to an undersupply of homes and an increasing number of homes reaching the prime remodeling age. The Federal Reserve's expected adoption of a less hawkish stance following the recent banking fiasco should pave the way for a recovery in the new residential construction market next year. Therefore, a slowdown in the housing market should be less concerning going forward.
Eagle Materials' margins are expected to benefit from strong pricing. Moreover, continued investments in operational and technology capabilities, along with the improved low-cost producer position achieved through recent acquisitions, are likely to result in cost savings and further margin expansion in the coming years.
Currently, the stock is trading at a discount compared to historical levels. Considering the favorable long-term prospects of the company and the discounted valuation of the stock, I recommend a buy rating for this stock.
EXP Q4 FY2023 earnings
EXP recently reported better-than-expected results for the fourth quarter of FY 2023. Sales for the quarter reached $452 million, reflecting a 13.8% year-over-year increase and surpassing the consensus estimates of $455.38 million. The earnings per share ((EPS)) also demonstrated significant growth, rising by 47% year-over-year to $2.79, exceeding the consensus estimate of $2.30. The increase in revenue during the quarter was driven by sustained robust demand, particularly in the cement segment, and strong pricing growth. Despite facing higher operational and input costs, the consolidated adjusted EBITDA margin expanded by 450 basis points year-over-year to 36.5%. This improvement in the adjusted EBITDA margin contributed to the growth in EPS for the quarter.
Revenue Analysis and Outlook
The company is benefitting from strong price realization across both the Heavy Material and Light Material sectors, resulting in solid year-over-year revenue growth in the last quarter.
In the Heavy Material business, which includes the Cement and Aggregates segments, there was 16.9% year-over-year revenue growth to $225 million. This was primarily driven by a 16.4% increase in the average net sales price in the Cement segment and the contribution from the recently acquired aggregates business which more than offset the impact of decreased cement sales volume caused by record snowfall in Northern Nevada and Northern California market during the quarter.
On the other hand, in the Light Materials business, which includes the Gypsum Wallboard and Gypsum Paperboard segment, there was increased volume in the wallboard segment. This, combined with favorable pricing, resulted in 11% year-over-year revenue growth to $244 million in this segment during Q4 FY23.
Looking ahead, a healthy demand environment, particularly in the Cement business, which has resulted in a sold-out position in the U.S. cement industry should support near-term sales. The medium to long-term outlook for this business also looks good and there is a high level of public support for infrastructure improvement which is evident from a significant number of infrastructure-related bills that were passed in the mid-term elections held last November. This coupled with the increased funding from the Infrastructure Investment and Jobs Act (IIJA) has resulted in a 35% growth in infrastructure contracts for highways, bridges, and tunnels over the past 12 months. Furthermore, spending at the state and local level is also expected to remain strong driven by healthy budget and tax receipts, particularly in the states where Eagle operates. In addition to driving volume growth, this strong demand should enable the company to implement further price increases. So, the outlook for the heavy side of the business looks good.
The outlook for the Wallboard segment, whose primary end-markets consist of residential new construction and remodeling and renovation (R&R), remains somewhat mixed due to the slowdown in the housing market due to rising interest rates. However, the good thing is the Federal Reserve is expected to become less hawkish after the recent banking fiasco which should pave a path to recovery for this market next year. Further, there are several company-specific factors that should help it do well. For example, the company has good exposure in the southern states which are doing well in terms of housing starts compared to other markets. Also, the company has good exposure to multifamily housing which is doing relatively well. Furthermore, historically low inventory levels of housing stock due to over a decade of underbuild since the great housing recession of 2008, indicate a positive outlook for residential new construction in the coming years.
The long-term outlook for the repair and remodeling market is also good. The aging housing stock entering the prime remodeling age is expected to grow over the next few years. Moreover, homeowners are sitting on all-time high levels of home equity, suggesting increased spending on remodeling and renovation in the future. These factors are expected to drive EXP's revenue growth in the coming quarters.
In addition to organic growth, the company is actively seeking opportunities for business expansion through acquisitions, primarily on the Heavy side. Recently, EXP announced the acquisition of Martin Marietta’s (MLM) Cement Import Business in Northern California which includes its cement import terminal in Stockton, Northern California. This acquisition is part of the company's strategy to expand and strengthen its distribution reach within the cement network across the United States. By participating in a robust market and meeting customer needs in areas where the cement manufacturing supply is challenged, the cement business is expected to benefit in the future.
Furthermore, the company maintains a sound financial position, with leverage below 1.4x. This financial stability supports the pursuit of strategic bolt-on acquisitions in the future, which will further enhance the company's revenue in FY24 and beyond.
Margin Analysis and Outlook
The company's adjusted EBITDA margin expanded by 450 basis points year-over-year to 36.5% in the fourth quarter of FY 2023. This growth can be attributed to several factors, including strong pricing and the implementation of cost-control initiatives in the Wallboard business. These measures effectively offset the impact of lower cement sales volume and higher operating costs in the cement business, as well as higher input costs in the wallboard business.
Looking ahead, the pricing increases should continue especially in the cement business given the tight demand-supply condition. This should provide ongoing support for the company's margin in the upcoming quarters. Additionally, the company continues to invest in operational and technology capabilities which is expected to result in cost savings for the company in the future. Further, the recent bolt-on acquisitions are anticipated to enhance the company's position as a low-cost producer. This, in turn, is expected to contribute to cost savings and facilitate margin expansion in the coming years.
Valuation and Conclusion
The company's stock is currently trading at a price-to-earnings (P/E) ratio of 12.53x based on FY23 consensus EPS estimates of $13.50. This valuation represents a discount compared to its five-year average forward P/E of 14.59x.
The company's revenue is expected to continue benefiting from strong pricing, secular tailwinds stemming from increased investment under the Infrastructure Investment and Jobs Act (IIJA), an undersupply of housing stock in the U.S., and a rising number of homes entering the prime remodeling age.
Furthermore, the company's margins should benefit from the strong pricing environment and continued investment in cost-saving initiatives.
One of the biggest risks to the company was the slowdown in the new residential construction market. However, with the recent banking fiasco, there is a good chance that the Federal Reserve adopts a less hawkish stance, which should facilitate the recovery of this end-market. So, we are likely near the bottom of this market as well.
Considering the company's positive long-term growth prospects and the stock’s attractive valuation, I recommend a buy rating on Eagle Materials' stock.
For further details see:
Eagle Materials: Reasonably Priced With Good Growth Prospects