A Rock-Solid Investment

03/11/2005 12:00 am EST

Focus:

Alexander Green

Chief Investment Strategist, The Oxford Club

"Why are we getting excited about something as humdrum as cement?" asks Alexander Green, investment director of The Oxford Club. Here, he explains the reason for his bullishness and looks at Florida Rock, a stock he views as a "rock solid" investment opportunity.

"I have just completed a survey of a number of Florida builders about the price and availability of cement. And prices are still going up. This is not a topic I care deeply about, ordinarily. But I've been paying closer attention since we began recommending Florida Rock (FRK NYSE) back in November. Since then our shares are up 23%, while the S&P 500 is up only 6%. The world is currently experiencing a shortage of the crushed limestone, calcium, and silicon powder used to bind concrete. And it's causing a serious pothole in the US economy. Concrete is used in the construction of everything from office buildings and houses to highways and runways. But, due to the shortage, a number of roads, stadiums, and patios are going unfinished. And major construction projects face serious delays.

"Enter Florida Rock. Based in Jacksonville, the company operates 108 ready-mixed concrete plants and 1,300 trucks that serve Florida, Georgia, Virginia, Tennessee, North Carolina, Washington DC, and Maryland. Florida Rock is one of the nation's leading producers of ready-mixed concrete and concrete block. And production and shipping at the company are running at full capacity. Part of that is due to the construction boom currently taking place in the Southeastern US. (It's estimated, for instance, that 1,000 people a day move to the Sunshine State alone.)

"But it isn't just local construction that causing a shortage. The building boom in China has quickly diverted building supplies that used to come to the US. China, in fact, is using 48% of the world's total cement production. Already home of the world's fastest growing major economy, China's pace of construction shows no signs of abating. The Chinese are busy building dams and roads, as well as Olympic venues. They are gobbling up all the cement they can get their hands on. As a result, cement shortages have been declared in 29 states. This is good news indeed for Florida Rock. In its recently reported fourth-quarter, for example, earnings skyrocketed over 70% in the concrete segment and over 23% in the cement segment. This is hardly a fluke. Since 1995, earnings at the company have grown an average 22% a year.

"Of course, some analysts believe Florida Rock's good fortune-like the state's flourishing housing market- is temporary. Maybe so. But I don't believe it. Housing and commercial construction in the US are booming right now. Spending on highway repairs and reconstruction are set to increase sharply, too. And Floridians, along with their insurance companies, are spending billions on reconstruction costs in the wake of four major hurricanes. A healthy backlog for new homes and a 41% increase in Florida's Department of Transportation budget should keep this rock rolling well into next year. And perhaps beyond. In short, demand is high. Supply is low. And management is already implementing steady price increases. 2005 should be another good year for Florida Rock."

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