By Matt Doiron
Texas Industries (TXI) is having a great year, with the stock rising 38% so far in 2012 and 29% in the last three months. The company surprised analysts by reporting earnings of eight cents a share in its quarter ending in May while analysts had been expecting a 34 cent per share loss. After three consecutive quarters in which losses were greater than analyst expectations, this positive earnings surprise likely shook off skepticism in the company and spooked any short sellers. Texas Industries provides heavy construction materials in the southwestern United States, with many facilities in the Dallas region, and was hit hard by the popping of the real estate bubble: it lost half of its market capitalization in 2008, underperforming the S&P 500, and is still down 30% since the beginning of that year.
Yet not one but two board members of Texas Industries think there is more appreciation in the stock price coming down the line and bought shares last week. Insider Monkey has found that statistically, consensus insider buying is a strong bullish signal and that is what we see here. The first purchase on July 24th by Sean Foley was only of 500 shares at a price of $44.28 and didn't seem to be that strong a signal to us. But Thomas Ryan, another board member, bought 2,000 shares directly on the 26th at an average price of $41.29 per share- almost the exact bottom before the stock began to rally over the last couple days- triggering our interest. We see more insider buying at Texas Industries in our database: board member Gary Pechota purchased 1,000 shares in April and large shareholder NNS Holding added a large number of shares in both April and June. While the April buyers have already seen substantial gains on their investments with the stock's rise over the last few months, the fact that more insiders are buying in now is quite newsworthy.
Earnings multiples aren't particularly meaningful at Texas Industries. Due to its poor recent performance, its trailing P/E is 163 and analysts expect it to be unprofitable for the next two years. The company also trades at 1.8 times the book value of its equity. There is not a value-oriented thesis here; an investor has to be confident that, as a general rule, stocks which see this level of insider buying outperform the market and so buying a large number of stocks which meet that criterion will lead to good returns. The largest 13F holder of Texas Industries at the end of March- and, therefore, the biggest beneficiary of the stock's rise since then- is Southeastern Asset Management. Managed by Mason Hawkins, Southeastern reported owning 8.2 million shares of the company (see other stocks owned by Southeastern Asset Management).
The annual report for Texas Industries, released earlier this month (the company's fiscal year ended in May), showed the beginnings of a potential turnaround. Revenue was up 4% from 2011 and net income was positive for the first year since 2008. The company managed to increase its shipments of cement, its primary product, and was actually able to hold its prices constant from last year even while its cost per ton dropped by about 10%. The company also generated profits from its aggregates and consumer products segments.
Texas Industries' largest competitor in the cement business is Cemex (CX). Cemex has similarly struggled, failing to turn a profit on a trailing basis, and like Texas Industries is not expected to be profitable next year either. Eagle Materials (EXP) and CRH (CRH) are fellow companies which produce cement as well as a number of other construction products, which may be helping their businesses endure: they are actually profitable on a trailing basis. At a fundamental level, we might prefer to buy these latter two companies, but they do not seem particularly attractive; on the other hand, we are interested by the insider activity at Texas Industries and think it might be worth further research from investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.