Shares of Eagle Materials Inc. (NYSE: EXP) are trading lower by more than 7% on Tuesday’s morning trading session; the reaction resulted from the company’s first quarter 2024 release, which left some investors scratching their heads, to say the least. It’s not often that markets get this disconnected from the fundamentals of a business, and this selloff could be more profit-taking rather than bailing out of the stock.
As investors will find out by digging into the financial results in just a bit, the plummeting stock price is far from justified; it could be easy to see how it should have gone in the opposite direction instead. Before the lion’s share of attention goes to Eagle Materials, it would be beneficial to peg this business against peers in the construction sector.
Gauging how the market feels about Eagle stock in comparison to other names like Vulcan Materials (NYSE: VMC) and even Martin Marietta Materials Inc. (NYSE: MLM) can give investors a better understanding of which company is likely to emerge as a winner this new cycle.
Good Enough for Warren Buffett’s Money
Over the past few quarters, Warren Buffett took enough of an interest in the U.S. real estate sector trends to start buying into them. Initially, he looked into the homebuilding stocks, picking up names like D.R. Horton Inc. (NYSE: DHI) and PulteGroup Inc. (NYSE: PHM); here’s his reasoning.
Despite trading at near – and new – 52-week highs, these stocks promised a lot more upside than meets the eye. Today, the way the U.S. housing market is headed, companies supporting new construction could be headed higher as they help break a stalemate between buyers and sellers.
According to the Intercontinental Exchange, most outstanding mortgages in the U.S. carry an average interest rate of 3.25%, making would-be buyers irk at today’s 7.3% average rate. More than that, the average home price jumped by 32% from where it sat before the COVID-19 pandemic.
In the blink of an eye, most Americans were outpriced and outfinanced. So, what can the invisible hand of the market do? It could start by injecting new inventory (building) to normalize both prices and supply.
This is where Buffett looked to start fishing, and that is why Eagle Materials delivered a record-breaking quarter.
Eagle Materials Picks Up 6x More Investors
That’s right. The stock currently trades at a price-to-book (P/B) ratio of 6.7x, 43% above Martin Marietta’s and Vulcan’s lockstep 4.6x multiple.
Even after falling this hard after earnings, the stock still hovers at 93% of its 52-week high, which is also near an all-time high. As Vulcan and Martin trade at similar price levels, investors need to find a way to see how Eagle stands out.
Stocks typically trade at premium valuations to the sector or to their peers for a good reason, and financial momentum could be one of them, or so Eagle’s first quarter 2024 earnings press release suggests.
The company reported record revenue of $2.3 billion for the entire year, pushing a 5% increase over the past 12 months. Net income followed suit at a record $477.6 million, jumping by 3% over the year.
Here’s where things get interesting. Revenue increased by only 1% every quarter, and net income dropped by 23%. When the company’s financials are broken down, investors will discover that this contraction is a blessing in disguise.
Competition is Good
According to the producer's price index (PPI), concrete ingredients and related products' pricing measures have risen consistently over the past 4 months, a sign of demand heating up for all the reasons Buffett was able to spot a mile ahead as usual.
This is where investors need to get picky, as more fierce competition leads to price wars and supply chains tightening, leading to Eagle’s contraction in gross margins and net income.
However, as the stock trades at a P/B premium to peers, markets still have faith that this is only a temporary bump in the road, and so does management. By buying back up to 388,534 shares (or $94 million) over the past quarter, Eagle’s management is telling markets that the stock is not only cheap, but its financials are also solid.
Wall Street is willing to bet along with management, as analysts at Truist Financial slapped a $320 a share price target for Eagle stock. This prediction dares the stock to rally by 35% from where it has fallen today.
So-called ‘Smart Money’ is also stepping up, as Eagle reports up to 96% institutional ownership currently, with players like Lazard Asset Management boosting its stake in Eagle stock by 1.7% to bring its net investment up to $11 million.
