Eagle Materials Inc (EXP)

[Democritus_of_Abdera]

Notes from EXP’s Q3 2007 CC

Currently, wallboard prices are trending down; albeit not as fast as in previous down cycles when the rate of decline was about twice what it is now. There are about half as many competitors in the market now, and a slowdown in production by all producers is forced because warehouse capacity quickly fills by unsold inventory (i.e. inventory capacity is inelastic). The wallboard pricing downtrend has continued into January at about the same rate.

In 2007 Q3 Eagle averaged $160/MSF of wallboard ($154/MSF in December). This compares to $176 per MSF in 2007 Q2 ($171/MSF in September).

Operating earnings from wallboard was $41.6M in Q3 compared to $58.8M in Q2.

EXP believes that the outlook for early 2007 residential construction looks to remain near current levels based on building permits, which are typically a better proxy at this time a year for near term trends, because of inconsistent winter weather. Once housing rebounds the wallboard supply-demand balance should soon follow. This could happen in 2007 or 2008.

About 20% of the wallboard manufacturing cost is due to energy. Natural gas prices have been dropping with the result that wallboard costs have fallen in the past quarter. EXP has hedged about 20% of their natural gas for this calendar year at about $7.50/MCF. <Note that natural gas prices had reached a peak of about $12/MCF in the autumn of 2005, but during 2006 have been averaging in the $7/MCF range. see: http://tonto.eia.doe.gov/dnav/ng/hist/n3035us3m.htm >.

I am focusing upon EXP’s wallboard business because I think that volatility in EXP’s share price will be dictated by up and down surprises in wallboard revenues. Wallboard generates about 50% of EXP's total revenue. The cement and aggregates business appears to be well defined (and doing very well).