Eagle Materials Inc. (EXP) makes basic building materials, such as gypsum wallboard, cement, recycled paperboard, and concrete.[1] Because many of EXP's customers are construction companies that specialize in residential housing, changes in the housing market affect EXP's performance. Sales of gypsum wallboard, the primary ingredient of drywall, declined by 7.8% by square feet sold in fiscal 2008 due to the decline in the housing market. However, the company's cement business is more insulated from housing shocks. Because the domestic supply is limited, construction companies must supplement their cement supply with more expensive imported cement. When demand for cement falls or shipping prices rise, the imported market takes the brunt of the loss in sales, as shipping costs raise the prices of imported cement more than domestically produced cement.[2] EXP's performance is also affected by foreign economies. An increase in China's demand for imported waste paper, the primary ingredient in recycled paperboard, raised production prices of recycled paperboard for EXP in 2008 by 9.8%.[3] Recycled paperboard often serves as the outermost layers of a sheet of drywall.

Company Overview

Because EXP manufactures materials used by the construction industry, its performance is linked to the condition of the residential housing market in the United States. As a result of its decline, EXP's performance suffered in fiscal 2008. The company's earnings were down 46.6% from fiscal 2007.[4]

Business and Financial Metrics

As of the end of fiscal year ending March 31, 2008, EXP operated five gypsum wallboard manufacturing facilities, four cement plants including six kilns, nine concrete plants, two aggregate facilities, and one paperboard plant.[5] The majority of EXP's operating earnings come from its cement operations, which in (fiscal year ending) 2008 were $106.6MM. The company's total net revenue for 2008 amounts to $749.6MM while its operating earnings before interest and taxes total $165.4MM.[6]

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EXP Annual Revenue/Net Earnings[7]
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EXP 2008 Revenue and Operating Earnings by Segment[8]

EXP's performance is closely linked to the US housing market. EXP claims that the decline in the residential housing market in (fiscal year ending) 2008, caused its gypsum wallboard net sales to fall by 33% as the market as a whole consumed 14% less. The decrease in demand for gypsum wallboard negatively impacted the sales of recycled paperboard because both are used in drywall. Despite these declines, Eagle Materials saw record earnings in its cement segment, which sold out for the twenty-second consecutive year.[9]

EXP estimates that 90% of the cement consumed in the United States is produced domestically. Because all of it is consumed, customers are forced to supplement their supply of cement with imports. The Portland Cement Authority estimates that imports represent 21% of the total cement consumed nationally for 2007, down from 29% in 2006.[10] The decline in the housing market did not affect EXP cement sales as most of the losses were absorbed by imported cement suppliers. EXP estimates that imports in 2008 were down 37% from the previous year.[11]

Business Segments

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EXP Revenue Breakdown By Segment[12]
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EXP Revenue Breakdown By Segment[13]
  • Gypsum Wallboard (32.2% of Sales,25.2% of Operating Earnings)

The Gypsum Wallboard segment of EXP is the second most revenue intensive segment in the company at $342.6MM, while the operating earnings it produces, $46MM, are less than half of those produced by the cement segment for 2008. The process of producing gypsum wallboard, the primary ingredient of drywall, is involved; the gypsum is either mined or purchased from a power company, converted into plaster, molded between sheets of paperboard and hardened, then cut and prepared for sale.[14] Eagle Materials' largest gypsum wallboard plant is located in Duke, Oklahoma, and produces approximately 1.3B square feet annually. [citation needed] The company as a whole produces 3.75B square feet each year and holds that it is the low cost manufacturer of gypsum wallboard.[15]

  • Cement (40.7% of Sales, 58.3% of Operating Earnings)

EXP's Cement segment is the largest in terms of both operating revenue and operating earnings. To produce cement, EXP first mines calcium carbonate (limestone). Most of the limestone is extracted from quarries either owned or leased by EXP, which estimates that its quarries have enough limestone to sustain 2008 levels of production until 2038. Other ingredients for the cement, such as gypsum, are supplied by various segments of EXP. To fuel the cement plants EXP primarily uses coal and coke, but is capable of using more expensive natural gas if necessary. Although Cement is the most profitable segment of EXP, the company notes that as it is most commonly used in construction, sales are often cyclical, especially in regions affected by seasonal cold weather. Over 50% of the cement purchased from EXP is consumed in public works construction projects.[16]

  • Recycled Paperboard (16.2% of Sales, 9.3% of Operating Earnings)

The Recycled Paperboard segment was established when it was acquired in 2000. The paperboard it produces is made completely of recycled materials, and is produced for numerous applications, including the paper lining of drywall. Other products include containerboard and paper for paper bags. All waste paper to be recycled is purchased from vendors within six hundred miles of the mill's location in Lawton, Oklahoma. EXP predicts that while its supply of waste cardboard and white paper will remain stable for the foreseeable future, increasing prices caused by increased exports of waste paper to China will affect EXP paperboard margins.[17]

  • Concrete and Aggregates (10.9% of Sales, 7.2% of Operating Earnings)

The Concrete and Aggregates segment supplies customers with both readymix concrete as well as batch concrete. Readymix concrete is shipped dry and to be mixed on site at construction sites while batch concrete is produced in manufacturing facilities and shipped via cement truck. EXP does not supply itself with 100% of its cement requirements for concrete production;EXP's Austin, Texas manufacturing facilities purchase the entirety of their cement from third parties. EXP extracts sand, another principle ingredient of concrete from its own quarries which are also either owned or leased. Due to the expense of shipping concrete, especially batch, the market for concrete is highly fragmented. EXP claims that it supplies few customers outside of a fifty mile radius of its plants.[18]

Trends and Forces

China's Demand for Recycled Raw Materials Negatively Impacts Paperboard Margins

In 2008, Eagle Materials sold its recycled paperboard for higher prices than in the previous year; however, China's increased demand for waste paper needed to manufacture paperboard raised its cost and reduced EXP's paperboard margin for the year by 9%.[19] EXP notes that an additional increase in price of waste paper, when combined with the increasing prices of natural gas, is likely to force it to focus on the production of lower cost paper products in the place of paperboard for gypsum wallboard.[20]

Falling Demand for Residential Housing Affects EXP Gypsum Wallboard Sales

Levels of demand in the construction industry affect EXP's different segments to different degrees. The gypsum wallboard segment is affected directly by declines in the housing market; sales fell by 7.8% in fiscal 2008. Gypsum wallboard is a primary ingredient in drywall, but is less versatile than the paperboard sheets that surround it in a sheet of drywall. Because recycled paperboard can also be used for a myriad of shipping applications, demand for paperboard is not as sensitive to changes in the housing market. Sales of paperboard fell less than 2% in fiscal 2008.[21]

High Shipping Costs Make EXP Cement More Competitive

The cement segment is generally unaffected by changes in the housing market because the United States does not currently produce enough cement domestically to meet demand. EXP claims that it has sold out of cement each year for the past twenty-two years. High shipping prices make imported cement significantly more expensive than domestic cement, ensuring that cement importers lose the majority of sales when demand falls. EXP estimates that in fiscal 2008, sales of imported cement in the United States fell by 37%, while its own sales increased by nearly 6%, despite an increase in price of 3% and increase in operating margin of 9%.[22]

High Fuel Prices Adversely Affect Eagle Materials' Ability to Transport Raw Materials and Manufactured Products

Concrete is not the only segment of EXP affected by higher fuel prices; each of the other segments rely on trucks and rail to transport raw materials, many of which are mined. Increased gas prices not only reduce operating earnings by increasing the cost of shipping by truck, but by increasing demand for the limited available supply of rail volume. Due to government regulations restricting the construction of new rail lines, when demand for rail transport increases, little increase in supply accompanies it, forcing a higher percentage of products to be shipped by truck.[23]


Competition differs in intensity from segment to segment, and is subject to change as costs of shipping restrict available markets based on geography.

  • USG (USG): Produces a wider range of building materials than EXP. Its largest segment is North American Gypsum which produced 48% of its net sales in 2007. It operates forty-six manufacturing sites in North America.[24]
  • New NGC: Owned by a subsidiary of Golden Eagle Industries and located in Charlotte, North Carolina, National Gypsum Company produces the Durabase and Gold Bond brands of wallboard.[25]
  • Koch Industries Inc: A privately owned company located in Wichita, Kansas. In addition to wallboard the company produces a range of products not limited to construction materials that include crude oil and process equipment.[26]

Gypsum Wallboard Competition

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2008 Gypsum Wallboard Market Share Estimate[27]
EXP reports that manufacturing industry of gypsum wallboard in the United States is fairly consolidated, with only eight total domestic manufacturers and seventy manufacturing sites between them. Of the approximately 30.2B square feet of gypsum wallboard sold in the United States in (fiscal year ending) 2008, approximately 65% was supplied by USG (USG), National Gypsum Company, and Koch Industries. Nationally, about 80% of the domestic gypsum manufacturing capacity was used in 2008.[28]

Cement and Concrete Segments Competition

The domestic market for cement is more fragmented than the gypsum market, and approximately 85% of the United States' cement manufacturing industry is owned by foreign corporations. Due to the difficulty of transporting cement with its low cost to weight ratio, it is expensive for a single manufacturing site to supply all regions of the United States. As of March 31, 2008, no cement company has facilities to cover every geographic region of the country. When cement is imported to augment the domestic supply, it is typically shipped through deep water seaports or up the Mississippi River to avoid trucking costs.[29] The concrete market is similarly fragmented as concrete is even more expensive to ship. It is rare that concrete is transported more than 50 miles from a manufacturing facility by truck or 300 miles by rail to a construction site.[30]

  1. "EXP 2008 10K, pg. 2"
  2. "EXP 2008 10K, pg. 8"
  3. "EXP 2008 10K, pg. 27"
  4. "EXP 2008 10K, pg. 2"
  5. "EXP 2008 10K, pg. 1"
  6. "EXP 2008 10K, pg. 2"
  7. "EXP 2008 10K, pg. 20"
  8. "EXP 2008 10K, pg. 22"
  9. "EXP 2008 10K, pg. 21"
  10. "EXP 2008 10K, pg. 8"
  11. "EXP 2008 10K, pg. 21"
  12. "EXP 2008 10K, pg. 2"
  13. "EXP 2008 10K, pg. 2"
  14. "EXP 2008 10K, pg. 3"
  15. "EXP 2008 10K, pg. 3,21"
  16. "EXP 2008 10K, pg. 7"
  17. "EXP 2008 10K, pg. 11"
  18. "EXP 2008 10K, pg. 12,13"
  19. "EXP 2008 10K, pg. 21,25"
  20. "EXP 2008 10K, pg. 27"
  21. "EXP 2008 10K, pg. 25"
  22. "EXP 2008 10K, pg. 14,21,24"
  23. "EXP 2008 10K, pg. 14,21"
  24. "USG Corp (New York Stock Exchange), Reuters"
  25. "New NGC Company Description, Hoovers"
  26. "Koch Industries, Inc. Company Description, Hoovers"
  27. "EXP 2008 10K, pg. 5"
  28. "EXP 2008 10K, pg. 5"
  29. "EXP 2008 10K, pg. 8"
  30. "EXP 2008 10K, pg. 13"
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