My elevator pitch on this one is as follows:  Eagle is taking advantage of the current slowdown to significantly expand its wallboard, cement and aggregate production capacities by as much as 30% over the next two years.  Eagle is spending close to $500MM on several expansion and efficiency projects and by the end of 2009 it will be a radically transformed company with substantially greater earnings power.  On normalized mid-cycle conditions, Eagle Materials will generate approx. $5/share of free cash flow and something in the range of $400MM of EBITDA.  On that basis, Eagle is easily worth $60/share and as much as $70-$80 in a takeout scenario.  The downside is limited to about $28-$30 based on earnings power of +$2/share even in trough operating conditions.  The risk-reward of +100% on the upside and -20% on the downside is very attractive. 

Current Capitalization:

Eagle is nearing completion on a new 750-msf synthetic gypsum plant in South Carolina that will increase the company’s wallboard production capacity by 30% to 3.8MM msf (msf = thousand square feet).  Eagle’s construction cost for the plant is ~ $150MM, or about $200/msf.  Pro forma for this expansion, I believe Eagle’s mid-cycle earnings power from its wallboard operations will be somewhere in the range of $150MM to $200MM, although those will fluctuate wildly from trough of as low as $100MM to a peak of as high as $300MM (estimated run-rates).  At my estimated long-term wallboard price of $130/msf and Eagle’s cash costs of about $80/msf (although that will likely come down), I calculate $170MM of EBITDA.  At 5x-6x EBITDA, I believe that in a hypothetical break-up scenario, Eagle would be able to sell this business for $800-$1000MM, or $20-$24/share.  At the midpoint of $800-$1000MM, the wallboard valuation equates to approx. $250 per msf of capacity, which compares to about $200/msf cost for a greenfield plant and is justified given Eagle’s plants’ access to low-cost gypsum rock reserves. 

On the cement side, Eagle is currently in the process of modernizing two of its four plants at a cost of over $300MM.  When all is said and done should result in a 30% increase in capacity and a 25% decrease in cash production costs and, again, will radically transform the company’s earnings power.  Moreover, Eagle is experienced in capacity expansion projects, having already successfully expanded capacity by 70% at its Illinois plant last year.  Throughout 2008 and 2009, Eagle will modernize its Nevada and Wyoming cement plants, a process which the expect to compete by late 2009.  Pro forma for these projects, which will cost $320MM, Eagle’s cement businesses should be able to earn somewhere between $160MM and $200MM of EBITDA.  Because the cement business is fairly stable (domestic market has been sold out every year for the past 21 years) and characterized by regional oligopolies, these businesses tend to fetch high multiples.  Texas Industries, a major cement producer in Texas and California, trades for 8.5x 2008 EBITDA.  In early 2006, Lafarge SA bought out its Lafarge North America subsidiary for 8x EBITDA.  In addition, environmental and other considerations have made it time consuming and costly to build new cement plants in this country, so there is a scarcity value on these assets.  I use a multiple of 7x for Eagle’s cement assets, and estimate them to be worth somewhere in the range of $1.1Bn to $1.4Bn, or $26 to $32 per share.  On a per capacity ton basis, this equates to $280 to $350/ton, which is slightly higher than my estimate of replacement cost of $200-$250/ton (although varies regionally).  I think the scarcity value and the amount of time it takes to build a new cement plant (2+ years) justifies the premium to replacement cost. 

I won’t spend too much time on Eagle’s two other businesses, paperboard and concrete and aggregates.  In the aggregate, excuse the pun, I think these two smaller business can generate somewhere between $35MM and $50MM of EBITDA and probably worth about 6-7x or $200-$350MM ($5-$8/share). 

Summary:

The crux of the thesis is that over the next two years Eagle is going to be transformed due to three very important capital projects that will enhance its earnings potential.  In the most recent peak in calendar 2006, Eagle earned $4 per share.  I believe that in the next peak, Eagle’s earnings could approach $7/share, and that due to its cost-reduction projects and existing low-cost position, it would be able to earn as much as $5/share under normalized mid-cycle conditions.  The next two years may be pretty lean, but I believe that looking out to 2010 is important because that is what management is focused on.  The company is conservatively managed and capitalized, and should emerge much stronger in time for the next cycle.  In the meantime, its stable cement and aggregates businesses generate consistent cash flow, which I think is not completely appreciated by many investors.