Texas Industries, Inc. TXI
December 21, 2003 - 7:33pm EST by
2003 2004
Price: 36.19 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 763 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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TXI produces building materials and its private market value is approximately $65 per share. TXI has already $28 of value in great and booming business (cement aggregates and ready mix) and even after a deep discount TXI’s steel business is worth $24 per share and in normal times $36 per share. The private market values are based on recent transactions.

Texas Industries, Inc. (TXI) is a supplier of construction materials through two business segments: cement, aggregate and concrete products (ready mix); and structural steel and specialty bar products. Through the cement, aggregate and ready mix segment, TXI produces and sells cement, stone, sand and gravel, expanded shale and clay aggregate, and concrete products from facilities concentrated in Texas, Louisiana, and California, with several products marketed throughout the United States. Through the steel segment, TXI produces and sells structural steel, piling products, specialty bar products, merchant bar-quality rounds, reinforcing bar and channels from facilities located in Texas and Virginia, for markets in North America.

The private market value calculation of TXI is the following: The cement business is worth $1.05 billion, the aggregate and ready mix businesses $372 million and the Steel business $775 million. (Below are detailed descriptions of how to get to those values.) Thus TXI's private market value is $2.197 billion. The company has $630 million in debt and $200 million in preferred, thus TXI’s equity value is $1.367 billion. TXI’s equity value of $1.367 billion divided by 21.1 million shares is $64.8 per share. Even with a big discount (33%) to TXI’s steel business as described below, TXI’s private market value is still approximately $52 per share.

The company is to heavily leveraged with debt which is too expensive, thus the company is a great take out target and its chairman is 67 years old. In addition, with the current economic recovery, TXI could sell is steel business, (at a 1/3 discount to normal market values), pay of $525 million of debt and be left only with $105 million of debt and $200 million of preferred and great cement, aggregate and ready mix businesses. Below are detailed descriptions of TXI’s businesses.

CEMENT – Cement is TXI’s biggest business with an approximately $1 billion market value. The cement business is currently good in TXI’s markets; residential markets are strong, the level of government construction projects is good and the commercial construction is decent. Due to ocean freight rates being up (due to the economy and high oil prices) imports are down and it looks like that for the first time in a few years, price increases are actually sticking. In general, the cement business is currently more stable than it used to be due to 1) a lack of price competition due to the recent consolidation in the industry, 2) capacity constrains of cement plants in developed markets because of not in my back yard and better financial discipline of the big players, 3) construction activity has less of a boom-bust character than in the past due to slightly better financial market discipline and anti cyclical government spending, and 4) a less cyclical residential housing market has stabilized the market. TXI has currently 5 million ton of cement production capacity and private market values are $210 per ton, thus TXI’s cement business is worth $1.05 Billion.

AGGREGRATES – Aggregates is a smaller part of TXI’s business representing approximately $250 million of TXI’s private market value. This is a stable business where sand gravel and stone is made into concrete, which is very much location dependant because of the high transportation cost to move stone. In addition, consolidation and “not in my back yard” limitations to new supply have made this industry into an oligopoly. The demand side of TXI’s aggregate business is similar to its cement business, driven by a strong residential business and a fair commercial and government construction business. TXI’s annual aggregates production is 21 million ton and that is valued at $12 per ton resulting is $252 million in private market value.

READY MIX – Ready mix is the smallest part of TXI’s business representing approximately $120 million in private market value (4 million cubic yards at $30 replacement cost per yard). The demand side of ready mix is good driven by a strong residential business and fairly good commercial and government construction business, while it is a competitive business thus less attractive than cement and aggregates.

STEEL – TXI’s steel business is worth approximately $775 million based on 2.1 million ton of capacity times $370 of private market value per ton. 80% of TXI’s steel business is steel beam used for office buildings and 20% is rebar used for roads (which is going OK). The steel beam business is under pressure because of the lack of new construction of office buildings. The vacancy rate in office buildings has to come down at least 5 percentage points for new construction to start again. With the current economic recovery, one could imagine that eventually vacancy rates will go down and new construction is going to start again, it is only a question of when. Currently, TXI could probably sell its steel business at a discount, say $250 per ton, which would reduce TXI’s steel business by $252 million or $12 per share (which would still result in $52 per share in private market value). If TXI would wait 2-5 years it could probably sell its steel business at the normal price of $370 per ton.

Catalysts: 1) TXI being bought out, or 2) the company selling its steel business, and 3) investors recognizing TXI’s value as its fundamentals are now improving driven by the stronger economy.


Catalysts: 1) TXI being bought out, or 2) the company selling its steel business, and 3) investors recognizing TXI’s value as its fundamentals are now improving driven by the stronger economy.
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