Eagle Materials, Answering America's Building Supply Needs

Key Points

• Eagle Materials has reported its latest financial performance, sending its shares higher to nearly reach a new all-time high price in the pre-market session of Thursday morning. 
• The rally comes amid a record-setting first quarter of 2023, where the company rode massive industry tailwinds amplified by its business model and product mix. 
• Analyst price targets seem conservative considering these valuation metrics; it appears that management and economic indicators at large would agree that the stock is in for a new high. 

Shares of Eagle Materials NYSE: EXP are rallying in the pre-market hours of Thursday morning as the company releases its quarterly earnings results, which delivered an exceptional quarter posting some record figures. The stock immediately rose by a s much as 3.3% as the news broke out, showcasing that despite analyst consensus targets suggesting the stock may be fairly valued, markets are showing their votes toward a continued secular trend in pent-up demand.

Investors will be pleased to see that their holdings in EXP stock have outperformed other peers in the sector, beating names such as Summit Materials NYSE: SUM, Martin Marietta Materials NYSE: MLM, and Vulcan Materials NYSE: VMC by an average gap of 5.5% over the past twelve months. The stock price appreciation outperformance comes with a rising share of a growing pie, as favorable free cash flow conditions allowed management to implement some attractive share repurchases. With record earnings per share and sustained momentum in virtually all segments within the business, a 3.3% rally is only the beginning. 

Big Picture is Still There

Eagle Materials reported a 15% bump in revenues to end the written fiscal year at $2.1 billion due to increased demand across all its product segments. Speaking to the first quarter of 2023, the company reports total revenue of $470 million to reflect a similar 13.8% advance. The heavy materials sector brought home the bulk of revenues to post a total of $1.3 billion, with an underlying annual growth rate of 11% for the year. As the company reports, these advances stem from an increase in cement prices, rising by as much as 16% to $147.50 per ton.

Having acquired concrete and aggregates businesses in northern Colorado and northern California, the segment also saw a bolt-on synergy of approximately $44.5 million in net additional revenue. As the United States government spending levels advance by as much as 1.15% during the first quarter of 2023, coinciding with a subsequent pick up in housing starts for the first quarter of 2023 relative to the fourth quarter of 2022, Eagle Materials is seemingly riding on a macroeconomic tailwind that may just be getting started. 

The light materials segment, which includes gypsum wallboard and paperboard, derived the minority of revenues through the majority of the growth. Posting net revenues of $980 million and an annual growth rate of 22%, light material demand rose due to similar macroeconomic dynamics. While paperboard sales volume decreased by 2% to 326,000 tons, the price for gypsum wallboard and paperboard increased at double-digit clips by 22%.

The gross margin boost from 24% in the first quarter of 2022 to a handsome 28.8% in the first quarter of 2023 reflects the lower energy costs of producing both heavy and light materials. Expanding margins led to capital allocation policies that should put a smile on the face of shareholders. 

Conservatism Aside

While Eagle Materials analyst rating points to the stock price is fairly valued today and even assigns some slight downside, many factors may deem these targets conservative. After posting a record quarterly earnings per share figure of $2.79 on a diluted basis, representing a 46.8% increase from the same quarter last year, EXP stock is now trading at one of the lowest valuations in nearly two decades (excluding discounts during the COVID-19 driven sell-off). Carrying a price-to-earnings ratio of 14.0x would place a fifty percent discount on multiple historical ranges of 23.0x to 25.0x. 

These valuations compare to peers like Martin Marietta Materials, carrying a P/E ratio of 26.3x, expressing a significant premium to Eagle Materials, and still underperforming on a stock price action basis. Based on favorable economic trends and industry tailwinds delivering record performance, management decided to allocate up to $388 million into share repurchases, retiring as many as 3.1 million off the open market. The total repurchase represented 6.7% of the entire company's market capitalization. 

Eagle Materials chart would show the stock gaining significant momentum since its bottoming on September 2022. Investors will be weary of the price testing the last peak of $169.15 per share, which marked an all-time high for the company. Considering the stock is already advancing within three points of this level, as the pre-market rally brings it to $166 per share, perhaps the top-side analyst target price of $168 per share seems like a more reasonable level to shoot for. With a bottoming United States Manufacturing PMI index (a proxy for economic activity) and a rebound in other indicators like housing starts and government spending, Eagle Material investors may soon be in for a new high.