First quarter earnings report

Is the worst behind us?

By George H. Reddin

George H. Reddin is a principal at FMI’s Investment Banking practice. He can be reached at 919-785-9286 or at greddin@fminet.com.

The construction materials peer group fared poorly in the first quarter of 2010 when compared to the first quarter of 2009. Revenues were down for all the companies except Holcim, which benefited from a more significant exposure to the growth in emerging markets. International-focused companies like Holcim and Heidelberg benefited from business activities in emerging markets, while companies concentrated in North America saw the most significant decreases in revenue. A rainy and cold first quarter also contributed to these poor results. Overall, the peer group had a median revenue decrease of just over 10 percent when compared to the same period in 2009 (see Figure 1).

Figure 1 * CRH report is for the first two months of 2010. ** Texas Industries is for the quarter ended Feb. 28, 2010.

On the bright side, product shipments for Cemex and Vulcan increased in March and April when compared to the same period in 2009, the first increase since 2006. This, together with a greater outlook for leading indicators of future demand such as contract awards for residential and highway construction, suggests an improved outlook for the balance of 2010, with most of this improvement expected in the second half of 2010.

Figure 2 * CRH has not reported for the first quarter of 2010. ** Texas Industries is for the quarter ended Feb. 28, 2010.

Earnings for the peer group followed revenue for the most part with a median decline in EBITDA of 15.5 percent when compared to the prior year in 2009 (see Figure 2). Holcim, benefiting from its presence in emerging markets, showed a 28.6-percent increase in EBITDA, while the balance of the peer group showed decreases.

Figure 3 * CRH has not reported for the first quarter of 2010. ** Texas Industries is for the quarter ended Feb. 28, 2010.

Balance sheet management was emphasized over the last year as companies sought to refinance debt and raise capital. Significant increases in debt associated with major acquisitions during 2003-2007, coupled with a near collapse of the credit markets in the latter half of 2008, had these companies focused on their leverage. Figures 3 and 4 present total debt/EBITDA (Figure 3) and EBITDA/interest expense (Figure 4) coverage ratios at the end of the first quarter in 2010 versus the same period in 2009.

Figure 4 * CRH has not reported for the first quarter of 2010. ** Texas Industries is for the quarter ended Feb. 28, 2010. Note: Granite and Texas Industries had negative EBITDA.

As shown, the results are mixed. While improvements have been made on overall levels of debt and liquidity, decreases in EBITDA have resulted in a mixed bag in the coverage ratios. We expect continued diligence to balance sheet issues.

The construction materials peer group saw an average increase of more than 40 percent in its total enterprise value/revenue valuations (see Figure 5) at the end of the first quarter versus the same period in 2009. During the same time, the S&P 500 and Dow Jones Industries increased by 46.6 percent and 42.7 percent, respectively.