Why EXP is worth a look

Eagle Materials (NYSE: EXP), based in Dallas, Texas, manufactures and distributes gypsum wallboard, cement, recycled paperboards, and concrete and aggregates. Their products serve the construction business, and given the slowdown in the housing market they are likely to experience some hit to margins and earnings.

The company boasts that it is the nation's highest margin construction products company. It is a low cost producer, it has stable earnings and cash flow, it cares about its shareholders (as shown by the increase in dividend and the effort to repurchase shares), but more importantly, it is undertaking significant efforts to continue growing. The company is in the process of completing the construction of another wallboard plant, and it is beginning to modernize and expand three cement plants around the country.

The company reported US$860 mm in revenues in 2006 and it is projecting US$925 mm in 2007, or 8% growth y-o-y (note: company has a March 31 fiscal year). Operating margins were 31% and are projected to reach 34% in 2007. EPS was US$3.02, indicating an approximately 16x P/E, close to the average range of 15x - 17x. EBITDA margin came in at 30% (US$258 mm). The company only has US$200 mm in debt and more than US$60 mm in cash. All in all, EXP has solid financials and if your investment time frame goes beyond 2007, this is a company that is well positioned to benefit once the construction cycle turns.

But, EXP is worth a look today because it is in a rapidly consolidating industry. The wallboard, cement, aggregates and concrete industries are seeing larger deals announced more frequently.

Votorantim Cimentos, a division of the Brazilian conglomerate Votorantim Group has been rumored to be aggressively seeking to acquire suppliers of aggregates in the US. The aggregates business of EXP could spark the interest of Votorantim given the solid operating history and market share of its business units. Its operations could help complement Votorantim's acquired units in North America.

We are entering a time where foreign investors, often overlooked as potential buyers, now have the capacity to assume the role of acquirers; as can be seen in the cases of Cemex pursuing Rinker, and CVRD acquiring Inco. No longer should US companies be seen as the only consolidators, because they are slowly becoming the targets.