Eagle Materials (EXP) operates in two primary business lines, Portland cement and gypsum wallboard; it has a reputation as a low-cost producer through all economic cycles, asserts Doug Gerlach, editor of SmallCap Informer.
This is possible as the company owns virtually all of its raw materials and operates with limited vertical integration. The firm operates in the U.S. sunbelt and heartland with 70 production facilities. Its business segments are geographically diverse, but are generally located inland and thus not threatened by low-cost imports.
Since 2010, Eagle has tripled its cement capacity through acquisitions and is now the largest U.S.-only player in the business. Its wallboard business not only survived the longest and deepest construction recession in U.S. history, it remained profitable.
Since 2013, Eagle Materials has been able to grow revenues at a very consistent 10.2% a year. EPS have shown more conviction as well as more volatility, with drop-offs in 2018 and 2019, but still clocked a 13.2% annual rate of growth on average.
We maintain five-year revenue and EPS growth expectations at a slow and steady 8.0% a year. A small dividend and price-to-earnings multiple expansion should lift shares above our long-term target.
Eagle Materials’ P/E ratio currently stands at 12.1, below our adjusted average P/E of 14.0. We think a high P/E of 18 is attainable, thus supporting a future high price of $306.
Based on the trailing 12-month EPS of $11.57, a low price of $114 is indicated, using a low P/E ratio of 9.9 — from recent levels, the upside-downside ratio is 6.6 to 1, and total annual return of 17.6% is possible.
We believe that much recession risk is already built into the share price of Eagle Materials, but there is always a chance of a greater downside. We prefer to buy now and be patient owners rather than try to time a purchase based on shorter-term reactions to economic conditions.