Longbow Sees 40% Upside In Eagle Materials, With Positive Catalysts Ahead

Building materials company Eagle Materials, Inc. EXP is likely to benefit from a host of catalysts over the near-to-medium-term, making Longbow Research incrementally positive on the stock. 

The Analyst

Longbow analyst Garik Shmois upgraded Eagle Materials from Neutral to Buy, with a $133 price target, suggesting roughly 40-percent upside for the shares. 

The Thesis

Pricing for Eagle Materials is tracking 200 basis points ahead of Longbow's earlier estimate, Shmois said in a Friday note, citing a wallboard survey conducted by the sell-side firm. 

The higher prices are offsetting lower first-quarter volumes that were negatively impacted by hurricanes, prepurchasing ahead of price increases and bad weather, the analyst said. 

Other catalysts that Longbow projects for Eagle Materials include an improvement in cement supply and demand over the next one to two years; potential cement and wallboard consolidation; wallboard cost advantages, optionality around fracking sand profits; and a potential break-up of the company.

The company is a takeout candidate, with the break-up value suggesting average upside to $140, Shmois said. 

"Based on our recent discussions with investors, it seems like an EXP break-up thesis is gathering more steam." 

Eagle Material's net debt/EBITDA is about 1x the estimated EBITDA for 2019, which gives the company leverage to participate in additional cement consolidation or to buy back 11 percent of its stock, the analyst said. 

Longbow sees valuation upside, as the shares trade at 8.6x the 2020 EBITDA estimate — below the 10-year average of 10x.

"Improving wallboard and cement fundamentals, along with the [sum-of-the-parts analysis] and breakup valuation support several catalysts for share price appreciation," Shmois said. 

The Price Action

Eagle Materials shares were down about 2 percent over the past year until Thursday.

The stock was trading up 5.18 percent in the Thursday afternoon session. 

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