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EAGLE to Fly – Long Term Investment Stock?



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May 01 2007
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Eagle Materials Inc. (NYSE: EXP, stock) will reports earnings for the fiscal fourth quarter today, Tuesday May-1-2007, after market close. Eagle Materials Inc. is a Dallas-based company that manufactures and distributes Cement, Gypsum Wallboard, Recycled Paperboard and Concrete and Aggregates. Originally part of Centex Corporation, Eagle Materials became a fully independent company through a spin-off transaction in January 2004.

Rating Indicators for EXP:
  • Wall Street consensus : 0.62
  • StockScouter rating : 6 / 10
  • Whisper Number for this stock : N/A
  • Schaeffer rating for this stock : 5 / 10
  • Power Rating : 6 / 10
  • Insider Trading (last 52 weeks) : N/A
  • Zacks Analysts Rating: Hold
  • Option Trading: July 2007 45.00 Call
  • Implied Volatility (IV) for June 2007 $45.00 Strike : 35.45%

Sales, Income & Growth – For the past 12-months, Eagle Materials registered $952.23 Million in sales versus the industry’s $14.18 Billion. Income amounted to $209.87 Million against the industry’s $1.32 Billion. While Eagle’s 12-months sales growth is at 14.5%, the income growth is in negative 41.70% (the same industry sector sales growth is at 18.20% and income growth of 7.30%).

Profitability & Financial Health – For the past 12-months, net profit margin is in the region of 22.0%. Eagle has a debt/equity ratio of 0.37 compare to industry’s ratio of 0.66.

Stock Resistance & Support Level – The resistance is at 45.63 (50-day moving average) while the first level support is at 41.27 (200-day moving average).

Risks – Shares are being heavily sold by financial institutions which do not augur well for a huge company such as Eagle. Also one or more analysts have modestly decreased quarterly earnings estimates for EXP.

Despite being expected to grow earnings at an annualized rate of 35% for the next five years, the stock trades for less than half of that growth rate. Clearly, investors are wary about the housing market’s short-term outlook. But the market’s shortsightedness has presented long-term opportunity for investors (only if you believe in this stock).

Eagle typically has less exposure to the vagaries of the housing market than your average building materials supplier. In the latest quarter, double-digit growth in Eagle’s cement and concrete segments helped dampen the blow of a relatively weak gypsum and paperboard market. Although the residential housing market is having a rough go of it, national demand for cement, especially in construction of roads and commercial buildings – remains at record highs.

Because of their diversified product mix, low-cost strategy, and focus on the Sunbelt regions, Eagle has managed to generate more than $100 million in free cash flow for the last four years straight. There’re basically three factors why Eagle should be in your stock’s portfolio:

  • Due to negative coverage on housing sector, most housing stocks are in oversold territory. As comparison Warren Buffett bought USG Corporation (NYSE: USG, stock), a construction materials sector stock which has higher forward P/E than Eagle.
  • Despite taking on fresh debt, Eagle is still in a solid financial position relative to its peers. The fundamentals reflect a strong business model and good management, and the technicals are right. Add all this to the fact that it’s trading at a 25% P/E discount relative to its peers, and it’s clear that EXP is a buy.
  • Despite any slowdown in the new housing market, Eagle Materials will remain strong. Even with a drop if the housing bubble bursts, owners of existing homes will always want to remodel their current homes which will still provide Eagle Materials with a significant share of the market.

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