Eagle Materials, Inc. Earnings Double on Record Revenue

By Markets Fool.com

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Eagle Materials (NYSE: EXP) reported solid fiscal second-quarter results before the market opened on Monday. The strong construction market drove results, more than offsetting the company's exposure to the weak oil market. Looking ahead, the company expects the construction market to continue to strengthen at the same time it sees oil-related spending recovering, which positions it to deliver improving financial results.

Eagle Materials results: The raw numbers

F2Q 2017 Actuals

F2Q 2016 Actuals

Growth (YOY)

Revenue

$332.7 million

$329.0 million

1.1%

Net earnings

$60.2 million

$29.8 million

102%

EPS

$1.25

$0.59

111.9%

Data source: Eagle Materials Inc.

What happened with Eagle Materials this quarter?

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Eagle Materials' cement business continues to set records:

  • Cement revenues edged up 1% to $166.8 million thanks to a 3% increase in the net average sales price. That said, volumes did slip 3% to 1.4 million tons due primarily to above average rainfall in the Midwest. Despite those weaker volumes, operating earnings rose 4% to a record $50.7 million. Driving profitability was a higher average sales price as well as the company's shift from oil well cement to construction grade cement in its joint venture. Meanwhile, concrete and aggregate revenue rose 7% to $38.8 million while operating profit surged 25% to $4.8 million due to improving aggregate sales volumes and higher pricing for aggregates and concrete.
  • During the quarter Eagle Materials announced that it has agreed to acquire Cemex's (NYSE: CX) cement plant in Fairborn, Ohio for $400 million. That transaction will bolster Eagle's annual cement capacity by 20% to roughly 6 million tons while providing Cemex with cash to pay down debt. Both companies expect the transaction to close by the end of this year.
  • Eagle Material's gypsum wallboard and paperboard sales were up 6% to $151.9 million while operating earnings increased 8% to $51.9 million. Rising volumes and lower costs more than offset weaker pricing.
  • The oil and gas proppants segment continued to be a drag on financial results due to the oil market downturn. That segment's revenue slumped 64% year over year on a 45% plunge in sales volumes. Those plunging volumes kept the segment in the red, with it reporting an operating loss of $4.1 million. On a more positive note, sand volumes surged 50% over the prior quarter thanks to a noticeable turn in proppant demand during the quarter. Rival proppant-maker Fairmont Santrol (NYSE: FMSA), likewise, reported a significant shift with its volumes jumping 20% sequentially. Because of that, Fairmont Santrol said that it was able to pass through much-needed price increases at the end of the quarter.

What management had to say

On Eagle Materials' fiscal second-quarter conference call, CEO Dave Powers offered the following perspective on its three business segments:

Gypsum Wallboard demand continues to grow. Industry shipments were up nearly 7% versus prior year. Household formations are increasing, and we believe housing has room to run. Accordingly, we anticipate demand for Wallboard to be up consistent with the outlook for housing starts. We have announced a January 2017 Wallboard price increase, and we look forward to sharing the results of that increase with you early next year.Our Cement business performed well, but was affected by weather, especially in Illinois, Missouri and Oklahoma. We believe that strong underlying demand fundamentals are intact and evident. We anticipate trend improvement in our Cement business consistent with our improved outlook for infrastructure, residential, and nonresidential construction spend. We believe that our oil well cement and our Proppants businesses are in the bottoming process. It is also our expectations that we will experience significant growth and demand for oil well cement and proppants over the next several years. In short, all of our businesses are positioned to enjoy improved fundamentals and earnings performance going forward.

As Powers pointed out, construction spending is driving results at the moment, contributing strong volume growth, enabling the company to raise prices. That is more than offsetting weaker sales to oil-related customers. However, with oil prices improving this year, it is setting the oil market up for a recovery. Because of that, Powers expects that the company's oil-related businesses will experience a significant improvement in volume and pricing. Given what rival Fairmont Santrolnoted this quarter, that is starting to happen.

Looking forward

Eagle Materials sees three catalysts driving its results higher in the future. First, the company expects that the construction market will remain healthy and drive sales volume and pricing growth in its construction-related segments. Second, it sees the oil market starting to rebound, which should drive steady growth from its energy-related products. Finally, the company continuesto seek out additional acquisition opportunities even after acquiring the Cemex plant, with Powers saying on the call that Eagle is "looking at a few things." Combined, these catalysts could drive meaningful revenue, earnings, and cash flow growth over the next year.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool recommends Eagle Materials. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.