Description

Eagle Materials is a building materials company that operates primarily in two sectors:

1. Heavy Materials - Cement in the mid-west and mountain regions

2. Light Materials - Wallboard in the southern US states

Note: EXP has a March 31st fiscal year end and is on Fiscal year 2021 right now. All references will be made in calendar years to simplify comparisons.

Their Cement business operates out of 9 plants in the states of OK, WY, KS, NV, TX, MO, KY. EXP’s cement business performed exceptionally well through the pandemic and outperformed peers (Summit Materials, Martin Marietta, Cemex, Heidelberg Cement, LaFarge Holcim) by growing organic volumes +1% in 2020 while their peers struggled to keep volumes flat in 2020. 

EXP’s Cement business benefits from good end-markets (50/25/25 infrastructure / resi / non-resi and has no oil & gas cement exposure, whereas all peers are directly or indirectly exposed to O&G by a couple %).

EXP's Wallboard business operates out of 5 plants in CO, NM, NC and OK. Their wallboard business is 85% levered to new-residential and EXP is on the cusp of the new residential construction boom. EXP’s wallboard volumes grew 6% in 2020.

Within the Heavy Materials segment, there is an ancillary aggregates business and within the Light Materials segment, there is an ancillary paperboard segment. Both smaller segments complement or provide internal value transfer internally. EXP also had a proppant business that they exited in 2020.

EXP’s wallboard business operates under American Gypsum as the #5 player in the US and is the crown jewel of the business because of the following attributes:

1. Highly levered to the US housing construction boom that is likely to last for next 2-3 years

2. EXP has a 60-year agreement with Santee Cooper to provide gypsum to all of EXP at a fixed cost, where there is a national shortage of gypsum. This contract is critical to EXP’s competitive advantage in the US wallboard industry

1. The shortage exists because of a lack of natural gypsum reserves in the US and synthetic gypsum is sources from coal ash that is in secular decline

3. Wallboard capacity has been in decline for the last 10 years as a result of the gypsum shortage. No new capacity has been announced in 10 years. Note Georgia-Pacific announced an optimization plan in 2020 to swap out old for new capacity, not add meaningful new capacity.

4. Wallboard can not be imported because it is friable, which extends the domestic moat.

5. Industry got significantly more consolidated after M&A in the last 5 years - Knauf acquired USG, St Gobain (Certainteed) acquired Continental Building Products)

1. While there was an initial market share grab in 2018/2019, that has significantly subsided and players are much more disciplined now

In summary, wallboard is a highly consolidated industry (4 large private producers, 1 public - EXP), cannot meaningfully add capacity or import and is levered to the US housing construction boom.

I think the value unlock in EXP will come from a spin that management has deliberated on for years and I think in 2021, that spin will come to fruition, following their upcoming February board meeting. EXP plans to spin the Heavy Materials business out and retain the Light Materials that probably culminates in an eventual sale.

In addition to the spin value unlock, I see significant upside to EXP’s 2021 EBITDA estimates as wallboard pricing is accelerating +5% QoQ in 1Q21 because of a January price increase, building off an October increase. 

I am expecting EXP to beat consensus by 10%, driven by wallboard pricing and volumes. Consensus is currently baking in the October price increase (~$10/sq ft) but I think they are not yet incorporating the January price increase ($10-$20/sq ft) and I believe that it will likely gain traction, especially in the residential channel. To note, the first $10 increase was to claw back pricing that was lost in 2019/2020 as a result of price competition that has abated.

Quick note on housing. We have already witnessed the housing boom that took place in 2H20, where homebuilder orders grew 30-40%YoY and existing home inventory is at a 5-year low. As a result I think the US new home construction market will continue to run ~1.5M SAAR for the next 1-2 years that should set-up HSD to LDD volume growth for EXP in the next 4-6 quarters.

Spinco / SOTP Valuation 

Looking at the SpinCo SOTP valuation, I think Heavy Materials warrants a 9x-10x multiple. Summit Materials, their closest cement comp trades at 9x on 2021 EBITDA and has a much weaker cement footprint, i.e., the Mississippi river cement market that is over-competitive with LaFarge and Buzzi as major players in that market. I think EXP’s cement business is much more robust as evidenced by their outperformance of 4-5% on volumes in 2020. The outperformance is attributed to a much better footprint and end-market exposure.

While there aren’t any good public comps for Light Materials business, I think it should trade at 11-12x given a strong position in a market with a good moat. USG and CBPX were also acquired at 12x-13x forward multiples as a sense for the M&A market valuation. Other building material peers trade at a range of 8-10x but they don’t necessarily show as much resilience as the EXP wallboard business who’s margins and volumes have been very stable over the last 5 years.

Catalyst

Spin-off of Heavy Materials in 2021.