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Contributors: Douglas McIntyre Jon C. Ogg

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Tuesday, September 26, 2006

Should Eagle Materials Really Trade Much Lower?

We just had an earnings warning out of Eagle Materials Inc. (EXP). The company put its fiscal 2007 EPS guidance at $3.80 to $4.20, down from $4.40 to $4.70 previously offered. The street was at $4.55, and that consensus estimate already came down once in the last 60 to 90 days.

Shares of EXP fell initially by 8% before buyers came in and some quick short covering, but now it is trading down some 11% at $34.87. Its 52-week low is $33.00 and the high over the same period is $74.55. This takes it back to the post Labor Day lows.

The reduction in annual earnings is primarily attributable to the accelerated decline in housing starts, which has led to weakened business conditions in its Gypsum Wallboard and associated paper businesses. Eagle also reaffirmed its earnings guidance for the second quarter of its fiscal 2007 ended September 30, 2006, of $1.30 to $1.40 per diluted share.

Outside of the gypsum wallboard and associated paper operations, it sells cement

What you have to wonder about is how much of this either WAS or SHOULD HAVE BEEN known. The actual homebuilders have been pulling out of options held on speculative property contracts and the home numbers have been showing a slowdown in mass on about every matrix followed.

Recently homebuilders and most related companies have been guiding lower and lower with regularity (many of them on more than one occasion) and the street had already factored in even lower numbers. And then they have been rallying. Just today, Lennar (LEN) warned and its shares have been up most of the day. They are essentially flat now.

USG (USG) has also traded lower by 3% to $47.23 on the Eagle Materials sympathy trade. USG has a 52-week range of $43.68 to $121.70. We'll have to see if Cramer can come back out and pump us USG again.

Maybe both of these will trade lower still, but you sure have to wonder if the market is always as good of a discounting mechanism as we have been led to believe.

Jon C. Ogg
September 26, 2006

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