Contrarian Opportunities In Cement For 2012

By Ryan C. Fuhrmann | December 22, 2011 AAA

Companies that count on construction activity around the globe have had a rough few years, while those dependent on residential housing build-outs have experienced severe depressions in their businesses. At some point in the future, industry conditions will improve, with many hoping 2012 is the first year of a sustainable upturn. Below is an overview of the leading cement firms in the world, and an overview of likely business trends in the next year or so.

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Cemex (NYSE:CX) is the worst industry performer by far in 2011; it has logged a share price decline of more than 50%. Fears abound regarding its potential to see an eventual sales recovery and reduce a hefty debt load taken on to acquire rival Rinker back in 2007, just as the housing bubble was really starting to burst. Cemex remains strong in its home country of Mexico and also has appealing exposure to emerging markets, but also has plenty of exposure to developed markets such as the U.S., U.K., Spain and other parts of Europe. Analysts project decent sales growth of nearly 6% for all of 2011, but for it to moderate to 2% in 2012 at just over $15 billion in sales. They expect an earnings loss of $1 for 2011, but for the loss to be cut in half next year. Additionally, debt is lofty at $17 billion, or 53% of total capital.

Eagle Materials
Texas-based Eagle Materials (NYSE:EXP) has a sizable cement business throughout the Southern U.S., as well as a major operation that manufactures and sells gypsum wallboard. Both mean significant exposure to domestic construction activity and residential homebuilding in particular. As a result, sales and earnings are down significantly from their peak in 2007, but Eagle has fought to stay profitable throughout. Sales growth should be modest for all of this year at only about 2%, but analysts expect an acceleration to 9% for 2012 and total sales of $514.5 million. Earnings per share should recover a bit by the end of 2012 to 82 cents. (To know more about EPS, read How To Evaluate The Quality Of EPS.)

Texas Industries
Texas Industries (NYSE:TXI) is also based in Texas and operates a number of business units that include cement and construction materials, including aggregates and consumer products. Cement accounted for nearly 42% of last quarter's total sales of $181.7 million and grew 12% while posting a profit of $6.5 million, or nearly double last year's first quarter. Despite this, management detailed that construction activity remained low in Texas and California, another of its primary markets. Like Cemex, analysts project losses for all of 2011 and 2012, though sales should grow more than 3 and 10%, respectively, to reach nearly $708 million by the end of 2012.

CRH plc
CRH plc (OTCBB:CRH) is based in Ireland, which happens to be one of the worst hit housing markets in Europe. Its products consist of cement, but also a wide range of building materials. For its most recent third quarter, sales rose 3%, but fell 1% for all of 2010 to 17.1 billion euros, as it also operates in the hard-hit U.S. concrete and aggregates market. Its operations in Poland, China and India are growing currently, but, like Cemex, exposure to developed economies have dented results for a number of years now. HOwever, unlike Cemex and more in line with Eagle, CRH has managed to stay profitable since the housing bubble burst.

James Hardie
Also based in Ireland, James Hardie Industries (NYSE:JHX) is a pure play cement that operates in both the U.S. and Europe, as well as parts of Asia. Second quarter sales jumped 15% to $331.6 million and profits came in at $127.4 after a loss in last year's quarter. For the remainder of 2011 and into next year, it expects U.S. residential construction and repair activity to remain "subdued" and also sees tough operating conditions in its Australian business. It does expect operating earnings between $126 million and $140 million for the full year, or as much as approximately 32 cents per share.

The Bottom Line
Given the volatility in earnings since the housing bubble deflated, valuing the cement and construction-related operations of the above leading industry players is a difficult exercise. 2012 isn't expected to result in a substantial improvement in industry sentiment or building trends, but conditions can't remain dismal forever. When an eventual upturn does materialize, Cemex and the other players should be able to return to more consistent growth, though it likely won't be near anywhere near the levels of the housing craze five years ago. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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