With the stock market climbing and good news about the economy appearing on the horizon, it's tempting to think that the economy will soon be out of the woods. Certainly, some of the building material and construction stocks, which had been heavily beaten down by the precipitous decline in spending last year and this year, have made nice headway recently, but does this mean an upturn is really taking hold? Let's take a look at some producers of the dullest but most necessary materials - cement, aggregates, gravels, asphalt components and cement-related products - to see what the future may hold for these companies.
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Few things are more basic in construction than cement, and Texas Industries (NYSE:TXI) makes it. With the decline in residential and commercial construction in 2008 and thus far this year, Texas Industries' stock reflected the resultant earnings drop off with a stock price that went from a high of around $90 a share in 2007 to as low as $12 a share this year, but has since rebounded to $36.50. Although Texas Industries' third-quarter earnings back in March were 37 cents a share compared to 53 cents per share the same quarter a year earlier, Wall Street responded positively anyway, because the company's steep declines appeared to be over.
Trading Vulcan, Martin Marietta Materials
Vulcan Materials Co. (NYSE:VMC), the Alabama-based concrete company, which produces cement, asphalt and aggregates, had been regarded as a sell in the fall after a run up, but is now touted as a buy on Thestreet.com. Why? Despite losing $32 million (29 cents per diluted share) in its first quarter, Vulcan is showing signs of healthy cash generation and is focused on sustaining this. And here's the kicker: government stimulus spending. Determining how much this will contribute to the company's bottom line over the next six months would be guesswork. However, the stock has responded positively to investors' optimism. (Some think that the U.S. government is too big to fail, but one must only look at historical examples to know that it's not true. See Is The U.S. Government Too Big To Fail?)
Martin Marietta Materials (NYSE:MLM), another asphalt, aggregate and cement maker, has also participated in the building materials stocks' rally, despite a rough earnings report for its first quarter, where sales were down 17% and earnings were $10.9 million, down from the year-ago quarter in 2008 of $42.9 million. The general mood suggests that even if economic recovery may not be imminent, at least construction spending has bottomed out and given way to investors' belief that more construction spending, perhaps beyond the known government stimulus packages, will happen soon.
How About Non-U.S. Companies?
Ireland's CRH PLC (NYSE:CRH), which produces cement and many cement-related products, had a challenging year for its earnings, but still did better than many of its large U.S. counterparts. So, despite the global recession, CRH's 20% earnings fall off from 2007 to 2008 might position it for a nice rebound when things pick up. Globally, though, it's not clear whether optimism across the board for building materials is justified. James Hardie Industries Ltd. (NYSE:JHX), the international Dutch cement and cement fiber products firm, has had a worse earnings story than many of the other aggregate companies through the recession thus far, with substantial losses in 2008.
A Caution Ahead
The stock market currently is riding an upsurge from its worst averages and consumer spending is showing some slight signs of coming out of its slumber. Manufacturing and construction spending are also showing signs of life. But despite the recent increase in April, the year-over-year numbers still show a decline; this decline may be slowing, but it's unclear as to what's ahead. (What people buy and where they shop can provide valuable information about the economy. Read Using Consumer Spending As A Market Indicator for more insight.)
A Sobering Look
A less optimistic take stock investors have had is addressed in a BusinessWeek piece, which pointed out that government stimulus spending should help, but construction spending overall is still expected to be soft and commercial construction will still be off - not only for 2009 but for 2010 as well.The softened market has and will continue to affect the credit quality for these companies, as Standard & Poor's has placed negative ratings on several of the companies. If the prediction is correct that an upturn in commercial construction won't truly take hold until the latter half of 2010, then it's clear that the building materials companies are still a long way from fully rising from their aggregate dust and ashes.