Eagle Materials Holding Up Ahead Of A More Challenging Year

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Weaker residential and non-residential building is going to region immoderate of nan momentum successful nan cement manufacture for 2023, and surely much than conscionable region nan marketplace for residential building materials, but nan outlook for 2024 and beyond remains robust. The residential lodging correction is apt to beryllium little (in portion owed to inadequate supply) and beardown national stimulus for infrastructure projects and small capacity maturation is apt to beryllium a powerful operation for cement for respective years.

Eagle Materials (NYSE:EXP) shares person done alright complete nan past year, outperforming CEMEX (CX), CRH (CRH), and Martin Marietta Materials (MLM) while underperforming Holcim (OTCPK:HCMLY) and GCC (GCC.MX). While nan shares aren't nan cheapest play connected cement retired there, I don't judge they should beryllium fixed that Eagle earns coagulated EBITDA per ton and its geographical footprint offers little vulnerability to import competition. Below nan $150s, I deliberation this is simply a sanction to consider, moreover pinch immoderate downside measurement risks successful 2023.

Weather Offsets Price In Fiscal Q3

Eagle is continuing to spot beardown realized prices crossed its businesses, but bad upwind and constricted surplus inventory compromised nan company's expertise to afloat leverage that value momentum successful nan fiscal 3rd quarter.

Revenue roseate 10% successful nan quarter, missing by astir 4%. Heavy Materials gross roseate 3%, pinch Cement down 2% and Concrete & Aggregates up 30%. Within nan Cement operations (80% of nan Heavy Materials segment), beardown pricing (up 13%) was offset by a 13% diminution successful measurement owed to inventory and upwind issues. Light Materials gross roseate 23%, pinch wallboard gross up 30% connected 5% measurement growth.

Gross separator improved 110bp from nan anterior twelvemonth and declined 110bp from nan anterior 4th to 31%. Adjusted EBITDA roseate 14% yoy and fell 12% qoq to $199M, while adjusted operating income roseate 17% yoy and declined 16% to $158M (including JV equity earnings), pinch separator up 180bp yoy to 30.8%.

By segment, Heavy Materials profits declined 11% (margin down 380bp to 27.2%), pinch Cement net down 9% (margin down 220bp to 29%). Light Materials net roseate 51% (margin up 750bp to 40.4%), pinch wallboard up 44% (margin up 390bp to 41.1%).

That 13% value leverage successful cement was beautiful overmuch spot connected pinch nan wide U.S. cement marketplace successful nan 4th quarter. Looking astatine immoderate comps that person reported, CEMEX posted 16% gross maturation successful its U.S. operations, pinch a 7% measurement diminution successful cement successful nan 4th and pricing up 21%, while Martin Marietta posted 8% maturation connected an 11% measurement diminution and a 21% summation successful pricing.

Calendar 2023 Will Be Challenging, But Better Days Lie Ahead

Between cement and wallboard, Eagle has important vulnerability to nan U.S. residential market. Residential usage accounts for astir 30% of U.S. cement volumes and astir 80% of Eagle's wallboard volume, and I expect this to beryllium a beautiful disfigured twelvemonth for caller starts. The Portland Cement Association feels similarly, pinch this manufacture group forecasting a 13% diminution successful residential cement request for 2023. While remodel/repair is meaningful to nan wallboard business, I expect a meaningful diminution present arsenic well, fixed really nan pandemic pulled guardant remodeling request and user assurance has softened.

Non-residential, too, will not beryllium overmuch of a help. I've been bearish connected non-residential successful '23 for immoderate clip now, and nan numbers are starting to backmost that up successful position of task activity and spending, and nan PCA is looking for a 2% diminution successful this conception (which accounts for astir 15% to 20% of U.S. cement demand).

Infrastructure should beryllium affirmative successful 2023, but federally-subsidized projects are only conscionable getting started. Growth is apt to beryllium successful nan debased single-digits successful 2023, but I expect meaningful acceleration successful 2024 and beyond arsenic road, highway, and span projects (as good arsenic different nationalist useful projects for illustration h2o infrastructure) move forward. I judge infrastructure spending could prolong high-single-digit cement request maturation for aggregate years, and location is nary meaningful caller capacity coming online, arsenic nan manufacture has been very logical astir adding capacity truthful far.

Cement is simply a location business, though, and Eagle's geographic footprint is important to consider.

Eagle has meaningful operations successful Texas but is different chiefly a Midwestern operator, pinch plants successful Ohio, Kentucky, Illinois, Missouri, Oklahoma, Wyoming, and Nevada, and terminals successful California, Utah, Colorado, Nebraska, Kansas, Oklahoma, Iowa, Missouri, Wisconsin, Indiana, Ohio, Kentucky, Pennsylvania, and West Virginia. That intends that faster-growing markets for illustration Florida, nan U.S. Southeast (the Carolinas, Georgia), Arizona, and Southern California are overmuch little important successful nan business mix. With that, I spot comparatively little leverage to residential and infrastructure maturation compared to players for illustration Cemex.

On nan different hand, that footprint is besides mostly good distant from nan coasts. With beardown pricing crossed nan U.S., operators are seeing much imports coming from countries for illustration Turkey, Mexico, and Vietnam, but it's impractical to carrier ample volumes of imported cement to astir of Eagle's halfway operating footprint.

The Outlook

One of nan issues I've had pinch CEMEX is that contempt nan company's charismatic U.S. footprint, its net successful nan U.S. cement business are substandard. That's not a problem for Eagle, arsenic nan company's U.S. operations are rather profitable connected an EBITDA per ton basis. They're not nan leader (that would look to beryllium GCC), but they're supra average, and I deliberation that's a beardown affirmative successful nan company's favour arsenic request reaccelerates successful 2024.

As Eagle's fiscal 2023 includes 2 quarters of 2023 and fiscal 2024 will arsenic well, nan financial reports will look a small different than peers. I expect Eagle to adjacent this fiscal twelvemonth pinch beardown double-digit gross maturation (+15%), while adjacent twelvemonth sees a mini driblet successful weaker volumes. I expect a double-digit rebound successful FY'25, though, and a fewer beardown years aft that pinch patient lodging and infrastructure markets. Long term, I'm looking for astir 6% annualized gross growth.

Higher input costs are an rumor now, and I'm not assured that these pressures are going to abate soon. Nevertheless, arsenic request reaccelerates successful CY'24, I expect bully pricing and bully operating leverage opportunities that will thrust mid-30%s EBITDA margins. Eagle has historically generated beardown double-digit FCF margins crossed its business cycles and I expect that to continue, pinch a fewer years of "over-earning" keeping FCF margins successful nan 20%s.

Eagle does look priced to make high-single-digit semipermanent annualized returns connected a discounted rate travel basis, but DCF is simply a reliable attack to usage for cyclical businesses. Using my preferred blended EV/EBITDA approach, I get a adjacent worth successful nan low-$160s based connected FY'24 EBITDA and a mid-$150s based connected a longer-term attack that factors successful full-cycle EBITDA (to mitigate periods of over/under-earning).

The Bottom Line

I kinda wish that Eagle had sold disconnected into this expected CY'23 downturn. Even so, I deliberation nan value is still reasonable and offers upside from here, though I do spot immoderate downside consequence successful nan adjacent fewer quarters fixed weaker fundamentals for nan U.S. cement end-markets. I'm consenting to take/look past that consequence to participate successful longer-term upside successful nan U.S. cement market, and I deliberation this is simply a sanction powerfully worthy considering, and particularly if location were to beryllium immoderate pullbacks connected weaker near-term quarters.

Stephen Simpson is simply a freelance financial writer and investor. Spent adjacent to 15 years connected nan Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That past portion isn't wholly true. Probably.