One Housing Play's Demons

Gerelyn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The housing market has once again proven its resilience, providing a bright spot in the economy even as policymakers and corporate America wrestle with the impending fiscal cliff. New home sales increased 5.7% in September, returning to 2010 levels. Housing prices -- something that homeowners and market participants are watching closely -- advanced 11.5% versus the year ago period while falling modestly in comparison with August 2012. 

Dallas-based cement company Texas Industries (NYSE: TXI) has many things working in its favor, not the least of which is the fact that it is tied to the housing market, which is in recovery mode. The company hasn't expanded beyond its niche of producing cement and has kept its regional focus strategically in the Southwest and Western U.S. Texas Industries' business remains vulnerable to commodity prices, but the company is growing its stock and its business volume.   

That's not to say that TXI doesn't have any demons, because it does and they're of the worst kind -- carcinogens. The cement company has been mired in class action lawsuits surrounding alarming levels of  chromium -- a lung-cancer causing carcinogen that is also dubbed Chrome 6 -- emissions at several of its facilities around the U.S, most notably in Riverside, CA. Texas Industries admits that the impact from complying with regulators could be significant, and states in its most recent 10-Q filing:

"It is possible that we could be held liable for future charges which might be material but are not currently known or estimable. In addition, changes in federal or state laws, regulations or requirements or discovery of currently unknown conditions could require additional expenditures by us." (TXI 10-Q).  

In 2008, the South Coast Air Quality Management District (SCAQMD) discovered dangerously high levels of Chrome 6 at Texas Industries Riverside facilities and in the surrounding areas. The company responded by changing its practices to reduce the dust levels and eliminate certain practices that were exacerbating the problem.  In its most recent 10-Q filing, the company states that it has reduced Chrome 6 levels down from a more dangerous 2.43 nanograms per cubic meter in 2008 to more recent levels of less than 1.0 nanogram.

Nonetheless, the 10-Q reveals that SCAQMD draws a plain comparison between living close to a TXI plant to living near a "rail yard."  From Texas Industries' 10-Q filing:

"...it stated that the risk of long term exposure immediately adjacent to the plant is similar to living close to a busy freeway or rail yard, and it estimated an increased risk of 250 to 500 cancers per one million people, assuming continuous exposure for 70 years."  -- (TXI's 10-Q)

Texas Industries, as it cleans up the Chrome 6 mess, presents its share of opportunity as well. Its regionally strong positions in Texas and California are great, because both states have booming populations, creating a market for cement makers. This, coupled with a strengthening price for cement, will benefit the company, according to a recent article in Barron's. TXI has a market cap of $1 billion, which places it in that sweet spot of takeover-candidate material.  The stock has advanced 38% year-to-date; nonetheless some analysts believe the stock has further to climb. 

TXI competes with the likes of Cemex (NYSE: CX), which is based in Mexico, but operates in the U.S. and European markets too. Cemex narrowed its 3Q loss, and is in the process of listing shares of a subsidiary on the Colombian stock exchange. Cemex is also in the process of slashing its workforce in Spain by as many as 400 cement laborers, according to an article in Reuters. Unlike the U.S., Spain's housing market is not in recovery and Cemex shares have lost nearly half of their value in Spain this year, Reuters points out.

The recovery in U.S. housing continues to strengthen homebuilders, several of which have been trading at 52-week highs of late, including Lennar (NYSE: LEN). As the order pipeline fills, it should be interesting to see how a trend of higher construction costs, spotlighted in The Wall Street Journal, will impact home developers like Lennar. This homebuilder has been busy scooping up land in Arizona, where skilled construction workers are scarce and land values have grown twofold from 18 months ago.

As the housing recovery in the U.S. continues to unfold, there will more than likely be headwinds, such as the soaring labor costs or the worker shortages hitting parts of the country. But that adversity is much more palatable than no growing pains whatsover, because the latter would mean there was simply no growth.


GerelynT has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Cemex. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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