Eagle Materials Inc (EXP)

[Democritus_of_Abdera]

April 2009 USG & EXP CC Note’s Relevant to wallboard prospects ...

Steven Rowley’s (EXP CEO) expectations regarding the timing of a recovery in the Wallboard Industry: “I believe this recovery will be a fairly slow recovery. So it’s not going to spring back by the end of this year. Maybe next year it will be a little better year as far as residential construction. In the following year, hopefully we’ll be back to more normal levels of residential construction. And when we hit that level, we need to have about 90% capacity utilization, to have very good pricing power in the wallboard industry. So that’s the level that we need to achieve a couple of years out.”

“Currently, the decline for wallboard sales opportunities is moderating. However, we have not yet seen the bottom, because we have not yet fully realized the impact of this year’s reduction in residential starts. Generally, there is about a three to four month lag before wallboard is consumed. This, combined with the continued waning in commercial construction and repair and remodel demand, has wallboard demand reducing.” .... USG notes that the repair and renovation market has been the fastest growing segment and is larger than new residential construction.

William Foote’s (USG CEO) expectation’s regarding residential demand five to ten years from now is based upon the projections of the Joint Center for Housing Studies at Harvard. He notes that the Harvard group projects a demographic housing need on the order of 1.5M /yr. New housing starts are now in the 0.5M/yr range, compared to a peak annualized level in excess of 2M/yr a few years ago.

More precisely, the statement by the Harvard group is ( http://www.jchs.harvard.edu/ ):

“Looking ahead, household growth should return to the path set by the changing age composition of the population, the strength of ongoing immigration, and social trends such as divorce and remarriage rates that influence the size of households. Indeed, if immigration remains near its current pace of 1.2 million per year, the combination of several years of high immigration, high divorce and low remarriage rates, and the aging of the echo boomers should push household growth to average more than 1.4 million per year in 2010–2020 (Table W-11). Even if immigration were to drop by about 30 percent, household growth should still exceed its 1995–2000 average annual level (Figure 12).” (The 1995-2000 average was 1.15 million/yr).

For the past quarter, EXP was getting about $109 to $110/msf of wallboard; about $6 better than the previous quarter. For USG, it was $121.42/msf, about $2.5 better quarter-to-quarter. Note that Temple-Inland’s prices were down about $3.... Steven Rowley attributes EXP’s relative gain as due to decreased freight cost. EXP’s plants are generally a little more remote to the market than the competition. Lower freight cost really helps the American Gypsum. In particular, “The gross price was up about $3 on average. The freight costs were down about $3 and manufacturing costs were down about $4. So that’s a 10, so that’s somewhere in there you kind of hit near that $9 number.” (i.e. EXP’s operating margin is up about $9 quarter-to-quarter).

The price of gas currently is about $3.60/decatherm (see http://tonto.eia.doe.gov/oog/info/ngw/ngupdate.asp for updates). It’s below the cost of production. A dollar per decatherm is worth about $2.25 per MSF cost at USG.