Eagle Materials Is a David Tepper Bargain
David Tepper (Trades, Portfolio) bought 774,637 shares of Eagle Materials (NYSE:EXP), taking up 1.88% in his Appaloosa Management portfolio. To be certain, he is making a broad based trade on the U.S. and its need (or consumption) of basic materials. Founded in 1963, Eagle Materials Inc. manufactures and distributes building products used in residential, industrial, commercial and infrastructure construction. Its segments are Cement, Concrete & Aggregates, Gypsum Wallboard, Recycled Paperboard & Oil & Gas Proppants.
Over the years, careful planning of its facilities and infrastructure, innovative equipment, and cost efficiencies have led Eagle Materials to be one of the lowest-cost producers across the majority of its products. This has helped Eagle outperform the S&P 500 by 31% over the last five years, but in the last three months, the stock has shed over 25% of its value, leading Tepper to get involved. He’s in at $ 68.42. You could be in around $ 60 per share.
Cement is the biggest revenue generator for the company. Eagle Materials owns or has interest in six plants with an annual net capacity of close to 5 million metric tons, which Eagle Material estimates 30 to 50 years of supply on hand for all of its plants. The current market price ranges between $ 85 and $ 100 per metric ton.
Here’s a great presentation from the company on the market.
http://files.shareholder.com/downloads/EXP/1187553890x0x857759/6487F4CC-EDB7-4DFE-ACE4-ED116AE1FC84/EXP-Investor_Presentation_Oct2015.pdf
A theme many analysts point to is the potential for highway infrastructure spending to accelerate. Historically, asphalt held a cost advantage over concrete being used in 85% of road construction. However, Eagle Materials (see the presentation above) notes that over the past few years, the value proposition has changed due to increasing asphalt bitumen costs, as well as the fact that concrete lasts twice as long before needing reconstruction. So, it becomes a much better investment to pave with concrete.
The company’s gypsum and recycled paperboard segments both rely on residential U.S. housing for growth. It’s strong for now and the company should remain strong for some time into the future. One of the key principles for investors is “don’t lose money.” While, at this price point, investors will have a fairly high margin of safety, that doesn’t necessarily equate to better than market gains in the future.
Eagle Materials is a business tied to construction — commercial and residential — and should continue to see market-beating performance as these areas continue to rebound from 2009 levels, both with new home starts and new legislation. In November, Congress passed a $ 300 billion highway bill that goes out the remainder of the decade and is set to improve roads and bridges. If Eagle Materials converts this into higher financial growth, the stock should see a bounce from these levels over the next year or two.
Disclosure: I have no positions in this stock.
