Eagle Materials: Take Advantage of the Housing Weakness

While we have not yet hit a bottom in the housing market, we may be starting to see the bottom taking shape on the horizon. The mid-cap, Dallas-based, Eagle Materials Inc. (EXP) could be a play off the weakness.

I see limited downside with Eagle for a few reasons:

Mr. Hirsch purchased 400,000 shares in September 2006 – he seems committed to shareholder wealth by expanding cement operations.

Dividend protection ($0.70 yielding 1.464% as of the close on 1/25/07).

Its 11.82 P/E, and especially the 0.41 PEG, fall below industry average, and suggest undervaluation.

While tied to the homebuilding sector with its wallboard production used for new homes, office construction and remodeling, Eagle also produces cement et al. for the construction sector.

“The company sells its products to build and renovate residential, commercial, and industrial structures, as well as to build and improve the roads and bridges.” (Yahoo! Finance)

Doesn’t the warmer weather bring new buyers to the housing market (especially with wages on the rise) and those intolerable three mile construction backups on the highways?

EXP as been climbing since shaking its October 52-week low, and has been trading above its 50 day moving on both 6 month and 1 year charts since.

Eagle is big enough to look for acquisitions but small enough to be part of an LBO ($2.31B market-cap).

Finally, see the below one year comparison chart of EXP vs. its top competitor, USG Corp. (USG), and look especially at the start of the housing slowdown -- tell me investors aren't now starting to realize Eagle was oversold.

After the poor 2006 housing sales number and Eagle’s earnings due out in less than a week, any pullback/dip presents a buying opportunity. I’m looking forward to watching Eagle on heavier than average volume, as it could be off to the races.

Disclosure: Author has no position in above-mentioned stocks

Comments

[jon edwards:]

Watch that P/E and your PEG, you are using trailing earnings, the forward estimate based on 2007 numbers will be closer to 13/14 and earnings will not grow this year at the recent rates

2007 Jan 29 09:26 AM