Stock Analysis

Could The Market Be Wrong About Eagle Materials Inc. (NYSE:EXP) Given Its Attractive Financial Prospects?

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NYSE:EXP
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It is hard to get excited after looking at Eagle Materials' (NYSE:EXP) recent performance, when its stock has declined 13% over the past month. However, stock prices are usually driven by a company’s financial performance over the long term, which in this case looks quite promising. In this article, we decided to focus on Eagle Materials' ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. Put another way, it reveals the company's success at turning shareholder investments into profits.

Check out our latest analysis for Eagle Materials

How Is ROE Calculated?

ROE can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Eagle Materials is:

34% = US$384m ÷ US$1.1b (Based on the trailing twelve months to June 2022).

The 'return' refers to a company's earnings over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.34 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

Eagle Materials' Earnings Growth And 34% ROE

Firstly, we acknowledge that Eagle Materials has a significantly high ROE. Second, a comparison with the average ROE reported by the industry of 13% also doesn't go unnoticed by us. Probably as a result of this, Eagle Materials was able to see a decent net income growth of 14% over the last five years.

Next, on comparing with the industry net income growth, we found that Eagle Materials' reported growth was lower than the industry growth of 19% in the same period, which is not something we like to see.

past-earnings-growth
NYSE:EXP Past Earnings Growth September 22nd 2022

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). This then helps them determine if the stock is placed for a bright or bleak future. If you're wondering about Eagle Materials''s valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is Eagle Materials Making Efficient Use Of Its Profits?

In Eagle Materials' case, its respectable earnings growth can probably be explained by its low three-year median payout ratio of 7.9% (or a retention ratio of 92%), which suggests that the company is investing most of its profits to grow its business.

Besides, Eagle Materials has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Upon studying the latest analysts' consensus data, we found that the company is expected to keep paying out approximately 8.5% of its profits over the next three years. Still, forecasts suggest that Eagle Materials' future ROE will drop to 24% even though the the company's payout ratio is not expected to change by much.

Conclusion

In total, we are pretty happy with Eagle Materials' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see a good amount of growth in its earnings. Having said that, the company's earnings growth is expected to slow down, as forecasted in the current analyst estimates. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

Valuation is complex, but we're helping make it simple.

Find out whether Eagle Materials is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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About NYSE:EXP

Eagle Materials

Eagle Materials Inc., through its subsidiaries, produces and supplies heavy construction materials and light building materials in the United States.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation5
Future Growth2
Past Performance6
Financial Health3
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

Outstanding track record and undervalued.