Eagle Materials (EXP): A solid play on the rebounding housing sector

By Michael Cintolo, Editor of Cabot Market Letter and Cabot Top Ten Trader
From Cabot Wealth Advisory 2/16/12 Sign up for Cabot Wealth Advisory free e-newsletter

Early on in a market advance, the true leaders usually act a certain way. They go up! But it’s more than just that; these potential big leaders often break out of basing structures within a couple of weeks of the market turn … and then keep rising day after day, week after week, as buyers overwhelm the sellers.

It’s this blast-off-type of action that, when combined with a great fundamental story and great sales and earnings growth, can clue you in to a big winner in the making.

One stock that fills the bill, but is outside the traditional growth realm, is Eagle Materials (EXP), a leading producer of housing and construction materials. If you’ve been reading me for a while, you know I am pretty bullish on the housing sector; no, I don’t think there will be a repeat of the bubble, but after a historic bust, the industry looks to have finally turned the corner.

Eagle Materials is participating in the move, and here’s what I wrote about the stock in Cabot Top Ten Trader back on January 16:

“Eagle Materials is another housing-related stock that is showing definitive signs of a turnaround. The story, of course, is anything but sexy–it’s a major producer and distributor of cement, concrete and aggregates, gypsum wallboard and recycled paperboard for use in both residential and commercial construction; Eagle is the fifth largest wallboard maker and 12th largest cement manufacturer.  Not surprisingly, business peaked back in 2007 (when the company raked in more than $4 in earnings per share) and has been sliding steadily since … though it’s important to note Eagle has remained profitable even during the housing bust, a sign of sound management. And now, with data pointing to a turnaround in the housing sector, including a pickup in new housing starts and permits, investors are looking ahead to what could be a quick rebound. Analysts see this year’s earnings gaining 121% to 84 cents per share, but we think that could be very conservative as most of the costs have been cut out of the system, allowing for any rebound in business to fall right to the bottom line. Quarterly results are likely out in early February.”

Earnings did indeed come out the first week of February, and they were terrific–revenues were up 19%, cash flow was up a huge 45% and earnings per share of 20 cents were up 67% from the prior year. The stock leapt on the news, and now trades in the low 30s. Impressively, it has refused to give back any of its gains since it got going in late-December.

Encouragingly, the average analyst estimate for fiscal 2013 (which actually starts this April) is now $1.23, up from an estimate of 86 cents before the quarterly report. Frankly, I think even this could prove conservative if the housing market indeed comes back.

Pullbacks are possible, but I think EXP is a solid play on the rebounding housing sector. A small buy here is possible, though ideally the stock will retreat to 31 or so, offering a better entry point.

Editor’s Note: Mike Cintolo is the editor of Cabot Market Letter, our flagship publication. Combining top stock picking, market timing and portfolio management, Mike has bested the S&P 500 by about 5% annually during the past five years–a period that encompassed bull, bear and choppy markets. With a new bull market taking hold, now is a great time to get in Mike’s program so you can take advantage of the leaders as they lift off. Click here to learn more.