At Independent Research we look for situations where there is a comparative advantage which often occurs in similar securities in different markets. It is worthwhile considering the value in US building products and cement stocks following the Boral acquisition of Headwaters. We follow about 200 industry sectors in the United States which we rank by market and internal performance. Right now building products and construction stocks are moving quickly up the ladder but are nowhere near the top ten per cent and are closer to 30 per cent. The big potential growth for Headwaters is its fly ash concrete infrastructure related business. Its building products which presently represent about 60 per cent of sales will require attention from Boral to lift the brands and especially its online wholesale presence for contractors.
The Numbers and The Valuation
Headwaters might be a good business and a good strategic fit but how does it compare with its industry peers?
We are not drawing a definitive valuation simply pointing out where Headwaters fits amongst its peers.
The US stocks of similar market cap size we have selected are:
- Eagle Materials
Headwaters trades at six times book and produces a return on equity of 30 percent. Dividing 30 percent by 6 produces a yield of 5 percent.
- Trex - 2.6 percent
- Eagle - 3.4 percent
- Summit - 5.25 percent
Vulcan Materials which is five times the size of Headwaters produces 1.75 percent no doubt reflecting its front-runner position.
The concretes, and cement sector is up from 102 to 82 out of 197 in the latest week. Miscellaneous building supplies are up from 78 to 71.
We focus on the top industry sectors for our general investment analysis. These industry ratings automatically disqualify us from investing except for a special situation.
In the past 12 months, the share price for these companies has appreciated by the following amounts:
- Trex - 65 %
- Eagle - 37%
- Headwaters - 21%
- Summit - 8%
Eagle, Headwaters, and Trex are in the top ten percent of earnings growth. Summit is in the top 30 percent.
Louisiana Pacific which was losing money until 2015 trades at 29 times earnings and three times book.
Owens Corning at $6 Billion returns 8 percent on equity and trades at 1.6 times book for a yield of about five per cent.
And for those addicted to franked dividends they are AS important a consideration in US valuations.
There were eight analysts following Headwaters before the bid.. no sells all buys or outperform. All analysts following Headwaters now have it on a hold.
It does not look like Headwaters is expensive in comparison with its peer group. There is execution risk and risk for the industry itself which although looking better is still not yet in the top ten .. far from it.
There is a break fee for Boral if the deal, which has been unanimously recommended, does not go through - and a few lawyers sniffing around looking for a better price for Headwaters.