Raw Materials For the Housing Resurrection
Nihar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
People who know me are aware that I like simplicity. Basic materials that are grown, harvested, or extracted are so easy to understand. I consider more complex technical things as well, but I always like to look at the companies that supply the materials that make up our lives. After looking at companies as investments for so long, sometimes I just come to the realization that every company out there is working in some way for the benefit of society. Even if there are disagreements about doing more harm than good, the purpose is to keep society going and improving.
Speaking of improving society and the potential for more harm than good, the housing market might be due for a rebound over the next few years. It might be slow to start, but once it gets going it keeps on going for a while. I am also looking for signs of commercial construction picking up, but I know that there is a ton of empty office space in my area. I would be looking for new construction in cheaper areas that will replace unnecessarily expensive places in California or on the East coast.
I have had Eagle Materials (NYSE: EXP) on my list for a while, and apparently so did everyone else. The company sports a PE ratio over 60. I cannot justify buying a company with a PE that high, or at least it is not easy to justify thought the low PEG ratio helps. This PE issue is becoming an increasing problem in companies I am researching. The market needs some sobering news, because things are not as good as the indices might lead you to believe. Not to be a downer, but it's true.
It is nice to see that an insider was buying EXP recently this has to make you wonder if it is truly undervalued. Perhaps a rise in construction will raise revenues enough that the price can start growing naturally instead of being driven by hope and expectations. A fairly valued company has a PE that is in line with the industry average and the price rises as earnings grow allowing PE to stay the same. EXP has some catching up to do, but it is still very early to call a recovery in construction. Fiscal cliff or bad news from Europe should give a nice opening. I would either wait or write puts to secure a lower price. Housing will not start booming overnight, but over the next few months it might be time to get set up for it. I think the market is aiming towards 2014 at the earliest but more likely 2015 for a housing recovery to be in full swing.
EXP makes cement and other products that will be useful for new construction and renovations. For renovations to wallboards will be the primary driver. My own belief is that renovations will begin shortly before a general housing recovery. One reason is just as a natural result of an improving economy, and a second reason is to fix a place up if you plan on selling as house prices improve. Spending $1000 on some upgrades can potentially net you more down the road if it makes the house nicer and able to command a better price in a seller's market.
You can also consider Martin Marietta Materials (NYSE: MLM) although it also has a PE around 60. They are in the process of considering a bid on Vulcan Materials (NYSE: VMC). I know it is popular to invest in the target; I would rather wait and invest in MLM. The interest in Vulcan is well known, and the price reflects that. Martin Marietta has its high PE, but if it can get the deal for Vulcan approved then I think it will pull back. The acquiring company tends to see the share price pullback as a natural effect of offering a premium to get a deal approved, and the market always sees this as too much. The premium is just goodwill and is not actually an asset that will bring in value. Martin Marietta is near its 52-week high so I would prefer an opening, because I do not see anything that will cause a breakout. First, the bid for Vulcan has to be made and then approved. So it is one to keep an eye on, but does not require decisive action.
EXP is more on the residential side, though it is involved in commercial and infrastructure construction as well. Most articles I have read talk about the company in terms of residential housing though. Martin Marietta is very large and with Vulcan it would be the largest aggregates producer in the world. Remember, concrete is made up of aggregates. These products are used in all kinds of construction including residential, commercial, and infrastructure construction. Asphalt and concrete are some of the two most widely used materials on the planet for roads and all kinds of buildings. I think infrastructure spending will become far more important for America. Infrastructure spending will become inevitable at some point as things start breaking from regular wear. Martin Marietta would be a normal choice when that happens. Add on an increase in housing and business construction and you have three strong positive signs for MLM, though all under the umbrella of construction.
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