There’s no stopping the Eagle Materials Inc (NYSE:EXP) growth train, with analysts forecasting high top-line growth in the near future. Over the past three months, the share price has been relatively stable, hovering at US$109 the time of publishing. I’ve been impressed with EXP for a while, with strong operations led by Mr. David Powers. Today I will touched on some key aspects you should know on a high level, around its financials and growth prospects going forward.
First, a short introduction to the company is in order. Eagle Materials Inc., through its subsidiaries, produces and supplies heavy construction materials, light building materials, and materials used for oil and natural gas extraction in the United States. Founded in 1963, it currently operates in United States at a market cap of US$5.22b.
EXP is exceeding expectations, with top-line rocketing up by 14.47% from last financial year , and a net income growth of 29.47%. In the last five years, revenue has grown 15.74%, congruent with larger capital expenditure, which most recently reached US$131.96m. With continual reinvestment into business operations, a return on investment of 19.70% is forecasted for the upcoming three years, according to the consensus of broker analysts covering the stock. Net income is expected to reach US$308.51m over the next year, and over the next five years, earnings are predicted to grow at an annual rate of 12.73% on average. These numbers tell me that EXP has a robust history of delivering profit to shareholders, with a disciplined approach to reinvesting into the company, and a bright future relative to its competitors in the industry.
Limiting your downside risk is an important part of investing, and financial health is a key determinant on whether EXP is a risky investment or not. Eagle Materials’s balance sheet is healthy, with high levels of cash generated from its core operating activities (0.54x debt) able to service its borrowings. Although its debt level relative to equity is high at 43.80%, it has been declining over the past five years from 70.26%. EXP also generates a sufficient level of earnings which amply covers its annual interest payment 11.26x. Management exhibits strong capacity to effectively utilize capital, increasing my conviction of the sustainability of the business going forward. EXP has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities. EXP has managed its cash well at a current level of US$9.32m. However, more than a fifth of its total assets are physical assets and inventory, which means that in the worst case scenario, such as a downturn or bankruptcy, a significant portion of assets will be hard to liquidate and redistribute back to investors.
EXP currently trades at US$109 per share. At 48.01 million shares, that’s a US$5.22b market cap – which is low for a firm with has a 5-year free cash flow cumulative average growth rate (CAGR) of 11.23% (source: analyst consensus). Given the consensus 2018 FCF level of US$218.20m, the target price for EXP is US$131. This indicates that the stock is currently priced at a non-trivial 16.90% discount. However, comparing EXP’s current share price to its peers based on its industry and earnings level, it’s trading at a fair value, with a PE ratio of 20.38x vs. the industry average of 17.31x.
As an investor, I look for investments which does not compromise one fundamental factor for another. EXP is appealing because of the growth story, the possibility that it is yet to be factored into the share price, and the strong capital management. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.