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Tuesday, November 10, 1998
Texas Industries Inc.
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Phone: (972) 647-6700
Website: http://www.txi.com
Price (11/9/98): $34 11/16
HOW DID IT FIND TROUBLE?
There seems to be a common theme among many of the companies highlighted in this feature lately: economic sensitivity. When recessionary pressures enter the realm of possibility, Wall Street tends to have a fast finger on the sell trigger when it comes to companies largely dependent on a vibrant economy, such as Texas Industries. With the hideous situation in Asia threatening to affect the domestic economy, the sell orders have been coming fast and furious for Texas Industries as fears of a cyclical downturn mount.
Between early May and October of this year, shareholders in Texas Industries saw the value of their stock rust away.
BUSINESS DESCRIPTION
Texas Industries is the nation's second-largest producer of structural steel products used in the construction sector and for various heavy industrial uses, such as railroads. The vast majority of sales in this segment are in North America. Interestingly, most of the company's raw goods come from recycled steel.
The company is also a large force in the cement industry as the largest supplier in Texas and a major player in California. Sales of the company's concrete are concentrated in the South and West near its production facilities.
The company has plans to open a new plant in Virginia next summer that will increase steel production capacity by 70%. Plans are also underway to expand the company's plant in Midlothian, Texas, to more than double cement production capacity there.
Texas Industries is part of the S&P 600 SmallCap index.
FINANCIAL FACTS
Income Statement
12-month sales: $1,198.3 million
12-month income: $104.7 million
12-month EPS: $4.69
Profit Margin: 8.7%
Market Cap: $860.3 million
Balance Sheet
Cash: $28.3 million
Current Assets: $427.0 million
Total Assets: $1,352.1 million
Current Liabilities: $167.4 million
Long-term Debt: $322.9 million
Ratios
Price-to-earnings: 7.4
Price-to-sales: 0.7
HOW COULD YOU HAVE SEEN IT COMING?
Investors in companies in cyclical industries need to keep a close eye on the economy and make sure not to ignore possible warning signs. It has been over a year since the problems in Asia started to shake the financial world, yet the downturn in the company's stock did not start in earnest until six months ago. Just in the last quarter the company saw a 27% drop in steel sales compared to 1997's quarter, and competition from cheap imports was cited as one of the reasons for the decline. The time between warning salvo and actual effect is often more than long enough to make a safe exit.
WHERE TO FROM HERE?
With Texas Industries being in a somewhat cyclical industry selling what are essentially commodities, there are some valid reasons why the stock will probably never trade at a premium to earnings. In fact, between 1995 and 1997 the stock never traded at more than 10x earnings. Even while the market was at its frothy peak trading at more than 30x earnings earlier this year, Texas Industries never got above the 15x earnings level in the last twelve months.
Part of the reason the stock could be trading at such a low multiple is that Wall Street may remember the last downturn in the company's business. Between 1989 and 1993 the company was barely able to scratch together a profit in each year. In fact, profits last year were more than double the total profits from that five-year period even though revenues are only modestly higher.
Nevertheless, there is some indication that the current discount could be overdone. One of the principal signs has been significant insider buying of late. As they say, there is only one reason insiders buy the stock. Furthermore, at 6x profits the company is near the bottom of its trading range of earnings. Just as the stock has never gotten above 15x earnings in the last five years, it has never traded below 5x earnings in the last decade.
One positive factor for the company is that cement does not lend itself to being imported or exported. The cost of transporting it is simply too high. So while the company may have a tough time competing with firms abroad in structural steel prices, the cement industry is largely confined to the domestic market.
Is the market being brutally efficient in predicting an economic slowdown or have traders overreacted to news that has yet to significantly impact profits? Investors who think the latter would probably do themselves a favor to give Texas Industries a closer look at these levels.
-Paul Larson
([email protected])
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