Understanding Eagle Materials CEO's Recent Share Purchase

Includes: EXP, USG
by: Yaser Anwar

Laurence Hirsch, Chairman of Eagle Materials (NYSE:EXP) recently purchased 400,000 shares of Eagle at an average price of $35.20 over the past few days:

  • The market reacted quite positively to this move, climbing more than 15% since then. So what does it bode for the stock? Laurence Hirsch of EXP has made a huge bet that commercial property seems to be on a different level than the housing market. How big a bet? $14+ million, equivalent to approximately 400K on his personal account. Prior to EXP, Mr. Hirsch had been the CEO of Centex (CTX), the homebuilder that spun off EXP in 2004.
  • EXP is the 2nd largest producer of gypsum wallboard, also known as drywall, after USG Corp (NYSE:USG), where Warren Buffett's Berkshire Hathaway (BRKA) raised its stake to 17.3% just last month.
  • The US Geological Survey [USGS] reported that crushed stone production in the first quarter of 2006 was 324 million metric tons, up 5.8% from the year-earlier level of 306 million metric tons. According to USGS data, the rise was due to favorable weather conditions and increased activity in commercial, private and public construction.
  • Aside from wallboard, which generates some 50% of sales and the bulk of its revenue, EXP also makes cement, ready-mix concrete, recycled paperboard, and aggregates. It sells primarily to residential, commercial, and industrial construction customers located near its plants in the western and southwestern US.
  • Trouble is, rough estimates from analysts and materials suppliers suggest that between 40% and 50% of wallboard demand comes from new residential construction. Less than mediocre forecasts from homebuilders such as Toll Brothers (NYSE:TOL) and D.R. Horton (NYSE:DHI) together with disappointing new-home sales data leaves little doubt that the residential market is slowing. What Hirsch is banking on is that this slack will be taken up by the commercial construction and home remodeling markets, which remain robust.
  • On the other hand, prices of commercial property have always been more volatile than those of housing, partly because the supply lags are longer. Developers plan new buildings when prices rise, but it often takes years to get planning permission and to construct a building, by which time demand may have fallen.
  • Booms and busts in commercial property caused widespread banking problems in the early 1990s, when property prices fell by 50% in America and Britain and by 70% to 80% in Japan and Sweden. The bursting of a huge property bubble was also a prime cause of Thailand's financial crisis in 1997-98.
  • Will history repeat itself? At least Mr. Hirsch does not think so and with about 47 million square feet of new office space expected to be completed this year, up 30% from 2005, and completions projected to increase 37% to 65 million square feet next year, he has good reason to believe EXP is well placed to cope with a residential market that is turning sour.
  • The 1st Q results were pretty good. They saw an increase of 26.9% to $259.97 million in revenues translating into a rise of 69.3% to $59.09 million of earnings, or $1.16 a share compared with 64 cents a year earlier. EXP expects to earn $1.30 a share to $1.40 a share in the 2nd Q and $4.40 a share to $4.70 a share for the full year.
  • With the stock at $36.69 on a Fwd. PE of 7.72 and an extremely low PEG of 0.21, Hirsch may have a point in thinking EXP is cheap.

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