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Hot Cement Stocks Starting to Show Cracks

TXI and EXP have run up with the rest of the homebuilding sector, but now you can find better growth elsewhere — and for cheaper

   

It looks like the market is betting on the blazing recovery in new home construction at its very foundation.

Literally.

Shares of the two pure-play domestic cement stocks are rallying like mad on the surge in new permits and housing starts — the most recent disappointing data be damned.

That has the stocks of Texas Industries (NYSE:TXI) and Eagle Materials (NYSE:EXP) looking dangerously overstretched.

Texas Industries has gained 85% in the past 52 weeks. Eagle Materials has more than doubled, jumping 113% over the last year. Both dwarf the S&P 500, which is up about 14% over the same period.

True, housing starts stumbled recently, coming in below economists’ average forecast, but they’re still expected to expand at a torrid pace this year.

Privately owned housing starts in came in at a seasonally adjusted annual rate of 890,000 in January, which is the latest available data. Although that represented an 8.5% drop from the prior month, it still was nearly 24% higher than the year-ago figure.

At the same time, building permits in January hit a seasonally adjusted annual rate of 925,000, up 1.8% from December and more than 35% higher than the January 2012 rate.

Yes, there’s a reason why construction employment is a bright spot for new job creation, with more than 150,000 employees joining its ranks just since September. It’s the same reason why homebuilder stocks are on a tear, helping the SDPR S&P Homebuilders ETF (NYSE:XHB) put up a 42% gain during the past 52 weeks.

Naturally, cement company stocks have joined in on the fun. Texas Industries and Eagle Materials are obvious plays on the rash of new construction, especially given their exposure to hot-growth markets in Texas and California.

But the trade is no secret, and the easy money looks to have been made, and more. Indeed, the entire sector might have been bid up to the point where it may have gotten ahead of itself, notes D.A. Davidson analyst Brent Thielman in a note to clients:

“At present, it appears most heavy building materials shares are trading based on assumptions well above current consensus. With improving fundamentals, we acknowledge opportunities for upside to forecasts also increase. However, investor expectations for stronger financial performance going forward may range from several months to several years. Risks associated with deteriorating market fundamentals appear lower than in recent years. Risks related to earnings and outlooks meeting a range of investor expectations for recovering financials in the short or medium term appear higher.”

And Thielman hardly seems alone in worrying that these names have run too far, too fast. Both TXI and EXP trade well above analysts’ median and average price targets. Sometimes that forces an analyst to up his target — but usually it results in a downgrade.

Additionally, neither of these names is really a screaming buy right now, at least in the collective wisdom of the Street. Of the 11 analysts covering Texas Industries, eight call it a hold, two have it at sell and one has a buy recommendation on the stock. EXP fares only slightly better. Of the 11 analysts rating the stock, nine call it a hold and two have it at buy.

Then there’s the relative valuations, which don’t scream “buy,” either.

Texas Industries is going through a period of narrowing its losses. As such, it has no forward price-to-earnings multiple. (No earnings, no P/E.) On a trailing basis, which isn’t all that helpful in a turnaround play, TXI’s P/E stands at a whopping 83 (for what it’s worth.) And although the company is forecast to greatly pare losses this year and next, it still has a nasty habit of disappointing the Street. It has missed on bottom-line estimates in six of the last eight quarters.

EXP, for its part, trades at a whopping 25 times forward earnings. Yes, that’s lower than its own five-year average of 30, but it still doesn’t make the valuation all that compelling — not when the long-term growth forecast is only 8%. Hell, the broader market is growing faster than that, and at a much cheaper price.

There are plenty of ways to participate in the housing rebound without assuming the risks of the pure-play cement stocks. As good a run as it has been, the bull case is developing too many cracks.

As of this writing, Dan Burrows didn’t hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/03/hot-cement-stocks-starting-to-show-cracks/.

©2014 InvestorPlace Media, LLC

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