Eagle Materials earns last laugh on Monday morning quarterback

Two years ago we saw Dallas-based Eagle Materials Inc., slightly reeling from a fracking sand production play, heed an activist investor’s proposal for a Light Materials (wallboard, paperboard) and Heavy Materials (cement, aggregates, concrete) business split. The action had the aura of an opportunistic New Yorker swaggering into Texas to shed light on running a construction materials business. 

Eagle Materials directors approved a plan for separately traded public companies: American Gypsum and a namesake entity then spanning Fairborn Cement, Illinois Cement, Central Plains Cement, Mountain Cement, Nevada Cement, and Texas-Lehigh Cement; GGBF slag cement processor and supplier Skyway Cement; plus, integrated concrete and aggregates operations in Texas, Kansas City and northern California.

Internal review and regulatory formalities meant the separation process would carry from mid-2019 into 2020. Management indicated progress throughout last year, but offered no target date. Wall Street observers awaiting a New York Stock Exchange Opening Bell ceremony for a new American Gypsum listing and newly structured Eagle Materials legacy listing will need a lot of patience. The producer announced late last month that it will not proceed with the split after all. The decision turned on stock valuation in record territory and superb fiscal 2021 results. Both reflect robust demand in residential and commercial building markets seemingly unphased by pandemic response measures, along with successful integration of Kosmos Cement plant and terminal assets acquired in a $665 million deal with Cemex USA. 

“Eagle is performing as well as at any time in its history. Both major business segments continue to post industry leading results on just about every measure,” observes Chairman Mike Nicolais. “While the Board will continue to evaluate the merits of a separation, it has concluded, with external advisors, that the combined Company is in the best position to create long-term shareholder value.”

Much has transpired to prompt directors’ change of heart, he noted in a fiscal 2021 results announcement: First, the size and financial strength of the company, with robust balance sheet plus diversified Heavy Materials and Light Materials asset base and geographical footprint, “have provided great comfort, stability and value to shareholders, employees, customers and suppliers during an unprecedented and uncertain time.” Second, given the continued consolidation in portland cement and wallboard production, coupled with rigorous examination of a number of strategic alternatives since the proposed split announcement, directors see a combined company with greater financial scale and flexibility as better positioned to pursue key strategic growth options and enhance shareholder value. Finally, the company has sold its Oil and Gas Proppants, or frac sand, business, along with non-core California concrete and aggregates assets. 

We could add a few economy of scale points to management’s rationale for respecting a profitable status quo. Separate American Gypsum and Eagle Materials businesses would have their own administrative and compliance overhead costs associated with publicly traded companies. How would such expenses weigh on cement and wallboard figures we see in the fiscal 2021 results? Consider the costs of specialized building and infrastructure market forecasting, plus related capital expenditure planning, presently spread over two profit centers: What value would shareholders realize from doubling the number of headquarters staff with advanced economics and business degrees? Were the Heavy and Light Materials business split proponents thinking long term or how separately traded Eagle Materials and American Gypsum might make attractive takeover targets?

The business split that made sense occurred in 2006, when Eagle Materials was spun off from Centex. The producer has since grown from a modest cement player with about 4 million tons’ annual capacity, to one with seven plants and 22 terminals equipped to move more than 8 million tons. Three decades after Lone Star Industries’ bankruptcy saw Wall Street nearly turn its back on cement capacity under publicly traded domestic companies, Eagle Materials has executed a business plan leading to a spot alongside the European heavyweights comprising the North American cement elite.