Eagle Materials Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Eagle Materials Inc. is a leading manufacturer of heavy construction materials and light building materials, with a focus on cement, concrete and aggregates, gypsum wallboard, and recycled paperboard products, primarily used in the construction and infrastructure sectors across the U.S.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Eagle Materials Inc. (EXP) operates primarily within the United States, focusing on two main business segments:

Heavy Materials: This segment includes the production, distribution, and sale of cement, concrete, aggregates, and related products. These materials are fundamental for infrastructure, commercial, and residential construction.
Light Materials: This segment centers around the production, distribution, and sale of gypsum wallboard and recycled paperboard used in residential and commercial construction. This includes operations within four separate divisions.

Competitive Strengths:

Low-Cost Producer Position: EXP’s strategic focus on cost reduction, driven by efficient production and logistics, is a strong aspect of their business model. Their plants are located near raw material reserves and in high-growth markets to reduce transport costs, which provides a competitive advantage.
Integration and Diversification: EXP operates an integrated network of plants and facilities which allows them to serve most US locations.
Proven Management: The management teams’ experience across the business and its commitment to maintaining a decentralized operating structure have enabled them to grow while maintaining profitability.
Substantial Raw Material Reserves: Having the ownership of their mines, quarries, and resources for 25+ years allows consistent and lower costs.

Industry Trends and Competitive Landscape:

The construction industry, where EXP plays a major role, has seen significant fluctuations. Demand for construction materials, driven by infrastructure projects, residential construction, and commercial construction, is cyclical and closely tied to overall economic conditions, as well as being affected by seasonality. This creates a volatile market environment which in turn causes an unpredictability to demand and prices for the company’s product.

Cement and Aggregates: These are commodity products, where price competition is strong. However, the need for local production and distribution provides a geographic advantage to some players, including EXP.
Gypsum Wallboard: This market faces competition from multiple players, but the cost of switching products is relatively high, providing some level of customer lock-in.
Recycled Paperboard: Highly correlated to market conditions. It can be impacted by increased raw material costs and prices for raw materials.

What Makes EXP Different?:

Geographic Diversity and Integrated Operations: EXP’s strategy of locating assets close to the customer base while also vertically integrating into the distribution process provides it with a huge competitive edge compared to competitors who have to do all the logistics separately. This unique position gives it a leg up in regional markets.
Low Cost Production: EXP’s commitment to low cost production by making use of their own mines and reserves with the use of modern technology makes it incredibly difficult for competitors to match the company’s margins.
Decentralized Operating Structure: The company’s decentralized operating system lets its local companies respond to local market demands, increasing its agility and competitiveness.

Financial Overview (Based on Form 10-K for fiscal year 2024 ended March 31, 2024 and Form 10-Q for the Quarter ended September 30, 2024, and Earnings Calls):

Revenue Growth: In fiscal year 2024, EXP achieved record revenue of $2.9 billion, up from $2.7 billion from fiscal year 2023. This increase is primarily driven by volume growth in Cement and Gypsum Wallboard segments along with higher prices, though the increase in Cement’s revenue was partially offset by lower volumes.

In the first two quarters of fiscal year 2025 (ended September 30, 2024), total revenue increased to $1.624 billion, up from $1.52 billion in the same period in 2023. This was primarily driven by an increase in both sales volume and price.

Profitability and Margins:

Gross profit increased by 11% in fiscal year 2024, due to higher sales prices and volumes in the Cement and Gypsum Wallboard.
In the first two quarters of fiscal year 2025 gross margin has increased to 33.1% from 32.5% in the first two quarters of 2023. The increase was driven by pricing increases which also increased operating earnings by $8.3 million for the same period.
In the first two quarters of fiscal year 2025 Net Earnings totaled $260 million or $7.39 per share, up from 10.8% of $128 million or $3.47 in 2023.

Capital Allocation:

EXP increased its cash dividends from 75 cents to $1 per share in the first quarter of fiscal year 2024. *The company is allocating significant capital to acquire limestone assets, and develop green cement technologies and production methods. *The company has an active share repurchase program that it utilizes when management believes the company’s share price is undervalued. During fiscal 2024, they repurchased 2.1 million shares for $492 million.

Balance Sheet Health: 4/5

Sound Liquidity: As of September 30, 2024, the company had approximately $46 million in cash. It can obtain liquidity through the revolving credit facilities to meet its short-term obligations. They also have strong cash generation capabilities.
Leverage: Long-term debt is $1.06 billion, which is at the high end but still below the market cap of around $10 billion
Equity: Strong balance sheet, with $1.43 billion in equity, showing financial stability.

While the company’s balance sheet appears healthy, their continued acquisitions that involve borrowing money or issuing shares, may lead to diluting the company’s per share value or increase the leverage.

Moat Rating: 3/5

While EXP displays several characteristics of a strong business, especially low cost production, the competitive environment of its primary segments is quite tough. Here’s a breakdown of its moat:

Narrow Moat: EXP enjoys some level of economic moat due to local economies of scale (high-density, low-value product distribution with a network of plants), the integrated distribution and sales networks, and also the favorable regulatory environments for quarries and cement facilities which limit new entries and creates local oligopolies.
Not Wide Moat: The company operates in industries that are often commoditized and prone to intense pricing competition. Despite brand recognition and cost leadership, these advantages may not provide enough buffer to consider the moat to be “wide”. Moreover, reliance on natural resources exposes the business to various operational risks and potential substitute products.
Overall: The company’s moat is best described as “Narrow,” it can generate higher profits than the competition but its competitive advantage may not be as sustainable or as powerful compared to a wide moat.

Legitimate Risks to the Moat:

Cyclicality: The construction industry is cyclical and can lead to wide fluctuations in earnings, particularly during recessionary periods.
Pricing Pressures: Strong competition in commodity-based products may affect EXP’s ability to maintain high margins.
Input Cost Volatility: Increased costs of raw materials, labor, and particularly energy, can reduce profit margins. Rising costs for diesel fuels and electricity can impact their transportation costs. The company uses primarily natural gas for its production and its price is extremely volatile and hard to control.
Regulatory Changes: Environmental regulations (such as emissions standards and limitations on quarrying), can be significant and costly. Regulations for the supply of cement, aggregates, and gypsum could be changed at any moment.
Financial Leverage: While debt is used to fund capital expenditures and acquisitions, it increases financial risk especially during an economic downturn.
Disruptive Technologies: While the products that EXP sells are not considered to be in an area where tech disruption is probable, advances in the building industry such as 3D-printing or alternative building materials may cause a disruption.
Acquisition Risks: Although growth via acquisitions have fueled the company’s revenue, there are always integration and execution risks associated with these activities, such as overpaying and underachieving with the integration.

Business Resilience:

Geographic Diversification: Having numerous facilities across the U.S. is a strength for the company’s resilience. By having a presence across different areas, it can reduce impact from localized issues and slowdowns, and capitalize on stronger areas when they arise.
Diversified Product Line: With different product categories such as heavy materials and light materials, the business has a wider variety of revenue stream which enables them to be more stable, versus if they focused only on a single product category.
Long-Term Contracts: Some of EXP’s contracts are long-term, which can buffer against periods of economic downturn.

Recent Controversies / Problems and Management’s Views:

Inflationary Pressures: The company has faced an increasing cost environment due to supply chain constraints and rising energy prices, but has offset this by increasing product prices. This strategy has proven successful, however, and management has noted their ability to raise prices as high as their competitors, and even higher on some product lines.
Supply Chain Disruptions: The company has been working through supply chain issues caused by the COVID-19 pandemic as well as geo-political instability. They have been able to leverage their established network to minimize those issues.
Increased Competition: As new competitors are beginning to emerge, management has stated they have been able to maintain their margins and market share. They focus on having a good balance sheet, long customer relationships, and their low costs in order to retain competitiveness.

While there are risks that must be considered with EXP, overall their consistent profitability, low cost of production, focus on integration and local dominance, and commitment to returning value to shareholders makes them a relatively strong business with a “narrow moat.” The company is not in a fast growing industry but by making itself the preferred vendor for the construction business in its local geographies, this is likely to translate into long-term stability.

Understandability: 2 / 5

Operations: The core business model is not overly complex to understand; it is essentially a manufacturing business focused on commodity products for the construction industry, the company produces and sells these products to consumers and firms.
Financial Statements: The financials themselves are relatively straightforward to analyze, but as the business is geographically diverse and has many subsidiaries, understanding the exact breakdown of financials and the reasoning behind them can be hard to analyze.
Industry Cyclicality: The volatility in prices, markets, and overall economics related to the cyclical nature of the industries they operate in makes forecasting financial performance harder to grasp.
Integration of Supply Chains: Understanding the logistics and planning for integration of different supply chains can be complicated and hard to grasp for the average investor.