If you follow the news, by now you have likely heard of the booming energy resurgence going on in the United States. Gas and oil production are both at levels not seen since the early '90s. This new production has been driven primarily from innovations made in well construction and completion techniques, the most important of these being hydraulic fracturing, or fracking for short. From the Bakken in North Dakota to the Eagle Ford and Permian in Texas and now to the Mississippian in Kansas and Oklahoma, there seems to be a never ending supply of new discoveries where horizontal drilling and fracking are showing success.
Other big news grabbing the headlines lately has been the slow but steady turnaround in the housing industry. The bust of the housing market is considered one of the triggers for the recent "great recession," and the industry took a huge fall from an annualized number of housing starts of 2.3 million units in September of 2005 to a low of 513 thousand units in March of 2009. Building permits for new housing units are up significantly from that bottom and appear to be on a steady rise.
One company benefiting from both of these uptrends is Eagle Materials Incorporated (EXP). Eagle Materials is a provider of building materials and serves markets throughout the United States. Its operations are segmented by product groups that include Cement, Concrete and Aggregates, Gypsum Wallboard and Paperboard.
Oil And Gas
Eagle has some great information in its most recent investor presentation highlighting the business segments connected with oil and gas exploration. Eagle is a leading supplier of oil well casing cement, and is expanding into sourcing high quality frac sand used in well completions. This is highlighted on page 24 of the most recent 10-Q release (emphasis mine):
During fiscal 2012, we purchased land with mineral reserves in the Midwest for the purpose of developing a frac sand business to serve the oil services and other industrial end markets. We have finalized permitting and plant design and are now focused on plant construction. We anticipate additional capital expenditures in the range of $25 million to $50 million during fiscal years 2013 and 2014 to support development of our frac sand business. We are also continuing to increase our production of specialty oil and gas well cement. This specialty cement generates higher profit margins than other cement sales and we are among the few companies that produce it.
To supplement the cement business, Eagle recently acquired two cement plants in Missouri and Oklahoma that increase cement capacity by roughly 60%, and provide a foothold into booming oil productions areas that should add new markets for well casing cement and frac sand. According to the Eagle investors presentation, frac sand use is projected to increase at a 12% CAGR through 2016, which should provide a solid return on investment on these acquisitions and capital expenditures. Eagle is estimating these acquisitions will increase revenue by $178M (27%) and EBITDA by $39M (28%).
The uptick in housing starts and construction activity is also having a positive effect on Eagle's bottom line. With the Q3 financials release, Eagle reported an impressive increase in wallboard revenues and earnings year over year:
Gypsum Wallboard and Paperboard's third quarter operating earnings of $24.8 million were up 362% compared to the same quarter last year. Higher wallboard average net sales prices, higher gypsum wallboard and gypsum paperboard sales volumes and lower recycled paper input costs were the primary driver of the quarterly earnings increase.
Gypsum Wallboard and Paperboard revenues for the third quarter totaled $100.3 million, a 37% increase from the same quarter a year ago. The revenue increase reflects primarily higher wallboard average net sales prices and sales volumes.
The average gypsum wallboard net sales price for the third quarter was $120.55 per MSF, 27% greater than the same quarter a year ago. Gypsum Wallboard sales volume for the quarter of 519 million square feet (MMSF) represents a 23% increase from the same quarter last year.
Looking at the current quarter, another price increase was instituted by wallboard makers at the beginning of 2013. Eagle is a low cost producer for wallboard and should benefit significantly from the margin increases on wallboard sales moving forward.
The company's share price has risen over 300% since September of 2011, and Eagle is now just $8 away from its all-time high of $74 set back in April of 2006. However, after making acquisitions increasing cement capacity, capital improvements increasing wallboard output and entering into the frac sand business, sales and earnings should have no problems exceeding pre-recession levels.
As a result, analysts have been increasing estimates and are now projecting earnings of $1.65 for 2013 and $2.83 for 2014, which provides a current PE of around 40 and a forward PE of 23 based on Friday's closing price of $66.34. While this is considered a somewhat high PE for the market in general, this seems a fair price based on the growth rate over earnings of $0.34 in 2011 and $0.42 in 2012.
Eagle Materials has positioned itself nicely to take advantage of two of the big market trends leading the economy out of the recession. The movement of the housing market back towards pre-recession levels, accompanied by increased opportunities in the oil and gas exploration market should continue to reward shareholders as the up-cycle continues.