A Concrete Rose in Texas
Thursday September 22, 4:27 pm ET
By Stephen D. Simpson, CFA
Want to build a house? You'll need cement. Want to build an office building? You'll need cement. So on and so forth. At the risk of gross oversimplification, if you want to build something much beyond a doghouse, a sandbox, or a bird feeder, you'll need cement. But cement is a capital-intensive industry that is also very sensitive to economic cycles. So while these are good days for the likes of Texas Industries (NYSE: TXI - News), it's not going to last forever.
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Having spun off its ownership interest in Chaparral Steel (Nasdaq: CHAP - News) a few months back, Texas Industries is a pure cement and aggregate company. Because of that transaction, first-quarter results are muddy. Sales were up 16%, but reported profit was walloped by more than $100 million in charges relating to that spinoff. If you back that out, per-share profits rose about 74%.
While the company has operations in six states, it primarily supplies cement (and aggregate) to Texas and California -- the two largest cement markets in the country. For the quarter, the company shipped about 7% less cement but had double-digit volume increases for both aggregate and ready-mix. On the pricing side, prices were firm across the board as cement and ready-mix prices increased by double digits.
With actual shortages being reported in some markets, these are good days for cement companies. And the profits across the industry reflect that: Other suppliers such as Cemex (NYSE: CX - News), Holcim (Nasdaq: HCMLY - News), and Florida Rock (NYSE: FRK - News) are also experiencing good demand and firm pricing. In fact, Holcim recently put through a $10-per-ton price increase, and Texas Industries management announced that it plans to do the same (to take effect in January 2006).
But sooner or later, new facilities will be built, substitutes will come into the market, and general economic activity will ebb. That's just the way it is with these companies. So while Texas Industries may yet have room to run, the time will most certainly come |
